The fact that anyone can call gold a bubble shows how much they truly misunderstand gold. CNBC correspondent Bob Pisani recently made such a claim when he gave his 2011 stock predictions including the statement, “the gold bubble will pop.”
For every other prediction Pisani made, he gave some sound reasoning for his thinking, whether right or wrong. That’s what you do when you make predictions, you state what you believe will occur and back it up with the reasoning.
But Pisani didn’t do this with his gold bubble popping prediction. Here is what he said;
Bob Pisani makes the prediction and says that gold stocks will fall 20%, but gives no reasoning as to why.
My speculation on this is simply that Pisani, like many others on CNBC and elsewhere who were bashing gold all the way up, don’t understand gold.
Gold Never Changes
The fact of the matter is, gold never changes. It’s only what it is priced in that changes.
If you bought a one ounce American Eagle gold coin in 2000 for the average price of $273.60, buried it in your back yard and dug it up today, it’s still the same coin. It didn’t change. But the current spot price for one ounce of gold did change as that one ounce gold coin is now worth around $1,385 an ounce, a 406% increase in purchasing power.
So when people like Pisani say gold is in a bubble, what they really need to say, is the U.S. dollar price of gold is in a bubble. In order for a gold bubble to pop then, would have to mean that more people put their faith in U.S. dollars than in gold. This would have to be because these people believe our government and the Fed have indeed led us out of the Great Recession and everything in the economy is returning to business as usual. But is it?
Yes, the stock market is currently breaking to new “post 2008 crash” highs. I have actually been bullish on the stock market as I mentioned when the DOW was sitting at 10,882 back in September. The DOW is presently sitting at 11,478, a 5.4% gain in 10 weeks. But the stock market is not indicative of the underlying health of the economy. The valuations don’t make sense from a P/E ratio perspective (read Ed Easterling’s book “Unexpected Returns” to understand this).
What is keeping gold somewhat steady is the fact other problems have surfaced in Europe, primarily with Ireland. Which leads to another critique of those like Pisani who are only U.S. centric in their thinking. Gold is not just priced in dollars. Gold is priced in all other currencies as well.
Gold priced in Euros had been a good trade I recommended in the latter part of 2009 into 2010, resulting in a 30% gain in about six months. Gold priced in Yen, a trade that I currently recommend dollar cost averaging into, has doubled gold priced in U.S. dollars the last 60 days (6.02% compared to 3.01%). This trade is taking longer to come to fruition than the Euro trade did, but traders will be rewarded soon enough with Japan leading the world in the Debt to GDP ratio battle.
It’s not just U.S. citizens who are clamoring for gold, but the world.
Gold is also maintaining its luster even with the Dollar Index rising up over 80 once again, up 26 cents to 80.62 today. But it’s the buying pressure that is keeping gold range bound for now. It’s actually just the weakness in the Euro and Yen of late that is causing the dollar index to rise. But the buyers of gold are what is keeping the price of gold propped up as seen in the following graphic from Kitco.com.
Gold’s Inevitable Pullback
Traders know that nothing goes straight up. And when a temporary top is reached, the subsequent decline will show price movement that at times will make them think we will break to new highs again.
We have definitely been range bound in the U.S. dollar price of gold of late. Pisani could get his pullback in price, but to claim a “bubble will pop” is premature. Investors need to know the difference.
What Bob Pisani Doesn’t Consider In Calling Gold A Bubble
There are issues that will arise in the next few years that will cause gold to enter its third “euphoria” stage that haven’t been dealt with, and the only solutions will be more government intervention/stimulus, causing the price of gold to skyrocket from any pullback.
Three of these issues that are still to surface, among many others, are
1. the problems with Fannie/Freddie.
2. the U.S. banking system bank failures continual rise amidst false mark to market accounting valuations and the FDIC fund which is still underwater to the tune of $8 billion.
3. Add to this a third issue that gets no attention in the financial media; the fact that there are over $3 trillion in sub-investment grade derivatives held by the nations top 5 banks coming due in the next 1-5 years. This will be explained more in a forthcoming article titled; “Snooky Bank Valuations; The Real Situation.”
Do I Buy Gold Now?
For now, dollar cost averaging into gold and silver, hoping the price goes lower makes sense and don’t be alarmed with the rhetoric from the financial media if there is a pullback in price. There is no gold bubble popping. The economic and banking troubles ahead, along with a congress that isn’t financially constrained and a Federal Reserve that will continue to interfere, will take care of the future gains in gold.
Taking profit on gold mining shares makes sense too, and converting those profits into physical gold and silver is my recommendation if you haven’t done so. I simply sit on the conservative side of the aisle and know how greed can come back to bite those who chase the extra profit.
If you don’t have 10% at a minimum of your portfolio in physical gold and silver, then consider yourself greedy. Take care of the basics first, then chase profit. But remember, it’s not wealth until you convert it to spendable wealth.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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