Is gold a risky, speculative bubble?

Understanding bubbles and risk

Another misconception surrounding gold that prevents individuals from entering the gold investment market is that gold is risky and speculative.

Concerns are expressed that gold prices have gone up over 6 times over 12 years and therefore gold must be in a bubble. Before you decide whether to buy gold, it is important to note the different between price and value when talking about the price of gold and gold bullion investment.

If you compare physical gold bullion holdings against other financial markets you see that global financial assets have increased over 6 times during this period. Gold prices might have increased, but they have done so against a back drop of even greater growth in financial assets, unprecedented money creation and intervention by the financial authorities.

Expert gold analysts still say that gold is good value, or undervalued, at the latest gold price.

If you want to understand whether gold investing is in a bubble, ask yourself these quick questions:

  • Is confidence in the financial and the monetary systems repaired?
  • Are the sovereign debt problems in Europe solved?
  • Are sovereign debt levels worldwide still worryingly high?
  • How will the US repay its $16 trillion odd debt load without some level of currency dilution?
  • Are central banks still printing money and increasing the money supply?
  • Is there likely to be more money printing in the future, or less?
  • Are real interest rates positive yet?
  • Is there greater responsibility returning to the financial system?

As these questions are so difficult to answer positively, the fundamentals behind rising gold prices still appear to be strong. Gold is far from overvalued, and is different to other assets in that its value can never go to zero. ¬†Physical gold’s unique properties allow it to offer crisis protection that stocks and bonds are simply unable to offer.

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