What is the real bubble? Gold or Treasuries?
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.