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What is the real bubble? Gold or Treasuries?



August 03, 2011 – Comments (11) | RELATED TICKERS: AUY , SLW , AG

We've had alot of bubbles form and burst in a over the past decade.  As a result we suddenly have alot of "bubble-callers" ready to call anything that has had a sustained price rise a bubble. 


Lately I've been hearing a lot of calls for a bubble in gold.  I've heard a few calls for a bubble in Treasuries.  So which one is it?  I've heard the arguments for both sides.  However, when I'm evaluating whether an asset is in a bubble, I don't just look at the price, I look at the fundamental factors leading INTO the price action.



Gold has enjoyed a healthy price rice over the last decade, rising from under $300 or so to $1667 as of today.  Based on price action alone people have some up with some compelling arguments as a to why a commodity that has appreciated over 500% over the course of a decade should be in a bubble.  They say that it pays no dividends, it has few industrial uses, its nothing more than a "shiny metal". 

On a more fundamental basis, gold has been used universally as a unit of exchange (money) for over 2000 years, only to be replaced with paper money within the past 100 years.  Despite many attempts at the contrary, you can't just create gold in a lab.  It has to be mined and refined.  Paper money on the other hand can be created and distributed however the creator pleases.  Paper money can also be destroyed.  However many "creators" of paper money don't want that money destroyed.  There seems to be differing views on who these "creators" of money are.  Some say its the banks, others say its the government.   Either way, paper money has an almost unlimited supply while gold does not. 



The US government earned its AAA rating by having the most robust economy in the world and relatively low debt for many decades.  However, with increasing globalisation and the rise of cheap labor, the US economy has been on the decline and the US debt load is constantly risen.  Currently the US economy is struggling to regain its footing while the US debt load continues to rise.  The Fed has tried to revive the economy with low interest rates but with little success.

Within the past decade US Treasuries yielded in excess of 5%.  Now 2 year Treasuries only yield .33% with 10 year Treasuries yielding only 2.6%.   Who in their right mind would want to tie up their money for 10 years only to recieve 2.6%?  Yet people continue to buy them.   There are times when the T Bills earn a negative yield but people buy tem anyway due to "percieved safety".   Yet the US government continues to spend well beyond its means on a daily basis, thus issuing more Tbills, notes, and bonds.  In other words, the supply of treasuries keeps growing.  So even though the supply of treasuries is growing in leaps and bounds and they yield next to nothing, sometimes less than nothing, people, countries, and institution continue to buy them, driving the yields even lower (price higher).  It seems as if the attitude right now is that the US can continue to issue Treasuries ad infinum regardless of price because people, countries, and institutions are going to buy them anyway.



It appears however, that not everyone is drinking the koolaid.  The European debt crisis, wreckless spending habits of the US, and the slowing global economy have some people afraid that their money will lose value.  There seems to be a slow powershift between the "Old Guard" economies and the emerging market countries, Some countries (namely China) aren't fully buying into the "full faith and credit" of the US and are looking for other places to park their funds.  This has created alot of uncertainty.  Safe doesn't seem safe anymore.  This has largely contributed to gold's recent price rise.  While the debt ceiling crisis may have been averted temporarily, the fundamental problem of the goverment spending well beyond its means remains.

What constitutes a bubble?

As sustained price rise does not in itself constitute a bubble.  Typically a bubble forms in an asset or commodity when the price of that asset or commodity continues to rise AFTER the fundamental factors contributing to the initial price rise have already subsided.  This happened to gold in 1980 when the price rose to $2000 AFTER Paul Volcker had already raised interest rates. Hence the uncertainty was gone.  The housing bubble peaked when housing prices rose beyond the majority of buyers ability to pay. All this was occuring while supply was rising in leaps and bounds. Hence the demand no longer met the supply. 

If sustained price appreciation alone  determined whether an asset or commodity was in a bubble then the DOW should be 1000 and the average home price should be $30000.


So which one is it?

You can probably guess from my commentary which one I think is the REAL bubble.  I've said it in comments on other Fool articles and blogs that I believe US treasuries are in a bubble.  But I find it interesting that gold is the one that gets all the attention.  All one has to do is do a Fool search on "gold bubble" and one will find dozens of hits.  If one were to do that same search for "Treasury bubble" how many results will you get? Personally I have not seen much attention devoted here or anywhere else in the financial news media regarding the Treasury bubble.  However the popping of the Treasury bubble would have much wider implications than the popping of any gold bubble. 

Personally I do not believe gold and silver are in a bubble...yet.  I believe that the popping of the Treasury bubble would send gold into a bubble as people scramble for another safe haven.

If the fundamentals for gold's price rise go away and the price continues to rise, then that will be my signal to exit.  Until then I'm going to enjoy the gold bull market.


11 Comments – Post Your Own

#1) On August 03, 2011 at 5:02 PM, lemoneater (56.61) wrote:

One of the strange uses of gold ever has to be as a health supplement. I forget what exactly it was supposed to help. Perhaps Kdakota can shed some light on the health advantages of gold.

Since it is impossible to entirely predict the near future having some precious metals along with other forms of currency seems only sensible.

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#2) On August 03, 2011 at 5:22 PM, kdakota630 (28.87) wrote:


I had this set to follow because I figured there might be an interesting debate come of it.  I certainly didn't expect my name to come up, especially in regards to health benefits.

As far as gold is concerned, I think the only health associated with it would be of the financial variety.

However, there do seem to be some health benefits associated with silver.

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#3) On August 03, 2011 at 5:35 PM, TMFAleph1 (89.86) wrote:

Why assume that you can't have a bubble in both simultaneously?

But to answer your question, gold is almost certainly a bubble.

Treasuries, on the other hand, don't conform as neatly to the concept of bubble, because, assuming you can hold them to maturity, your nominal return is known in advance and assured (the real return is another matter.) However, I'm happy to call them significantly overpriced and distinctly unattractive as an investment choice.

Alex Dumortier

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#4) On August 03, 2011 at 6:34 PM, nuf2bdangrus (< 20) wrote:

"This happened to gold in 1980 when the price rose to $2000 AFTER Paul Volcker had already raised interest rates"  DOn't think you meant to say was in the 800's

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#5) On August 03, 2011 at 6:50 PM, TMFAleph1 (89.86) wrote:

The previous gold bubble peaked at a nominal price of $850 on Jan. 21, 1980. That is the all-time high price in real terms, equivalent to roughly $2,400 today.

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#6) On August 03, 2011 at 11:49 PM, GNUBEE (< 20) wrote:

Gold, because powers that be will do everything to prevent treasuries from popping. Treasuries got bigger concerns.

If you think you know all the tricks that can be dont.

Gold is bubblicious. Thing is when will it pop?

......that's the question.

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#7) On August 04, 2011 at 9:22 AM, lemoneater (56.61) wrote:

@ #2 Kdakota, great to hear from you. Thanks for the very informative wiki link about silver in medicine. I wonder how much silver is diverted to medical uses both in medical hardware and in alternative medicine?

I mentioned gold because I saw some colloidal gold for sale at Earth Fare. Alternative medicine sometimes is a little like alchemy.

Of course, It sounds like long term ingestation of silver can be a problem. For those who enjoy literary references to unusual medical conditions like argyria read Poor Miss Finch by Wilkie Collins a contemporary of Charles Dickens. Collin's novels are a quicker read with fewer characters and tighter plots than Dicken's novels.

If gold cost less, I think that more industrial uses would be found for it. I wouldn't be surprised in the future if gold has some extremely practical use not as yet discovered. I know that gold makes amberina glass have a rich red tint.  

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#8) On August 04, 2011 at 11:41 AM, kdakota630 (28.87) wrote:


No problem with the silver link.  Personally I'm not one into a lot of that health stuff and don't believe in a lot of it.  I have a friend of mine who takes some sort of silver on a regular basis but he's a little out there at times believing in a lot of stuff that I regularly call "b.s." on.  My area of interest and expertise is more in the sports nutrition area.

As for how much silver gets used for heath-related areas, I'd wager it's not enough to affect the price of silver too much (if at all) one way or another.

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#9) On August 04, 2011 at 5:05 PM, lemoneater (56.61) wrote:

kdakota, thanks for your reply. My mother, my aunt, and my mother-in-law are all into health stuff in varying degrees. (My aunt in particular is the most fanatical about health food, but the best cook of the three. I don't always wish to know what ingredients she uses :)

I will keep in mind that your area of expertise is sports nutrition. 

It would be neat to see a breakdown of silver as to industry demand. I've heard photographic film uses it and I think cellphones might as well. 

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#10) On August 04, 2011 at 5:14 PM, kdakota630 (28.87) wrote:


Here's a decent site regarding silver's uses.

My understanding regarding industrial uses of silver was that a lot of it was used in photography.  With the advent of digital cameras most of that disappeared but the slack was taken up in other, more tech-type uses.

As for the health stuff, generally speaking, there's a lot of health food out there that I'm just not that interested in.  Like wheat grass juice.  Perhaps this is shallow of me, but I want to build muscle, be strong, and look good, and health will come with those things.  I don't want to choke down some gross green concoction if it's not going to help me achieve those goals.  LOL!

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#11) On August 05, 2011 at 11:57 AM, lemoneater (56.61) wrote:

Great website on the uses of silver. I had no idea it was so crucial to the solar industry. I also like that it has practical uses in water purification. Neat!

I have to say that I drew the line at blue green algae supplements for myself. My mother put some in my cereal and when I poured in the milk it turned green. I got her to confess what she had done. She said "I knew you wouldn't want to try it, but I want you to be healthy." Wish granted I'm very healthy already.

outoffocus, sorry for getting somewhat off topic. Hope you have a great weekend!

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