Related topics: gold, Federal Reserve, currencies, inflation, MoneyShow.com
As gold prices soar, we're starting to hear rumblings about a bubble.
That's not surprising, given gold's performance. The yellow metal has catapulted from a rock-bottom low of around $250 an ounce in 1999 to about $1,380 by mid-October. That's about a 10% annualized return, far better than U.S. stocks and considerably lagging the best-performing emerging markets.
And there's much anecdotal evidence of growing enthusiasm. Media coverage is picking up. Central banks, which notoriously sold at the bottom, are buying again. Famed hedge fund managers George Soros, John Paulson and Paul Tudor Jones have piled into gold exchange-traded funds and mining stocks.
But when I look harder at past bubbles, such as those in stocks and housing, I don't think we're in the full-fledged buying panic that usually marks the endgame.
fact, I think the decade-long gold supercycle has some time to run. But we're closer to the end than the beginning, and I'm watching carefully for signs of the blowout phase before selling any of my small position in the SPDR Gold Shares (GLD, news).
Gold is traditionally seen as an inflation hedge, yet it has racked up its biggest gains in a decade when the most widely used measures of inflation have been quiet. Lately, it has moved up sharply amid fears of deflation instead.
But during gold's "golden decade," which coincided almost perfectly with the "lost decade" for stocks, the Federal Reserve under Alan Greenspan unleashed an easy-money policy the likes of which we'd never seen -- until his successor, Ben Bernanke, did him one, or two or even three better.
In the Greenspan era, that approach led to the housing bubble, an orgy of speculation on Wall Street and, ultimately, the crash and financial crisis from which we're just beginning to emerge.
The result: a hobbled U.S. economy. Bernanke's Fed has already pumped $1.75 trillion of cash into the system in its first round of "quantitative easing" (money printing). An additional $1 trillion or so may be added when the Federal Open Market Committee meets in early November.
All these moves have one thing in common: They have debased the value of the dollar, which has declined dramatically in the past 10 years. For many, gold has become an insurance policy against a weaker dollar, still the world's reserve currency. So, in the bull market for gold, it is the weakness of the dollar (and other paper currencies) -- not inflation -- that has driven gold's rise.
