Chicago Gold and Silver Investing Fan Blog

A Candid Analysis on Why Gold is Not in a Bubble

Cycle investing is all about buying an asset when it is undervalued, staying disciplined and not sell when the price rises, then having the fortitude to sell when you feel the asset is overvalued. See every asset goes in cycles. It cannot raise forever- even gold. If the price of gold rose up forever, you would soon have enough to where one ounce can buy all the real estate in the world. So even though gold is rising in price (and value now) - it is currently at about $1660 an ounce- at some point the price and value will inevitably have to come down.

So how do we know if gold is undervalued or overvalued at this time?

There are two camps of thought on this. There is one camp that says that gold is in a bubble, it is overvalued, and you should avoid it at all cost. Many liberals and progressives fall in this camp. On the other side is the camp that feels that gold is extremely undervalued and now is the time to buy.

To best determine who is right, a good investor does a great deal of research and analyst. One source of reliable information is the CPM Group's Annual Gold Yearbook. Below are two graphs from the latest edition.

This first graph shows that since 1990 the global financial assets has risen in every asset class from stocks (represented as gray in the chart as equities), government debt securities(T-Notes, etc), private debt securities, and bank deposits.

This chart shows that despite the rise of the gold price every year since 1990, gold is still only about 0.7 as a percent of global financial assets. It can be concluded by looking at the charts that since 199 the world's financial assets have risen- even gold. However, gold as a percentage of global financial assets is still very low. A bubble is when the price of an asset is overvalued - much like real estate prices in the United States were overvalued a few years ago and tech stocks were overvalued in the early 2000's. In the case today, the price of gold is is increasing but compared to the percentage of the world's assets it is not rising tremendously and is still a small amount. If anything,the world is awash with too much paper assets and not enough gold assets.

The rich don't value money as much as they do aquiring assets

How do rich people become rich? The typical answer is because they have a lot of money. But contrary to that belief, the rich don't become rich because they value money. No, the rich become rich by acquiring assets.

Middle class and poor people work for money. They trade their time for money in a regular job or a self-employment situation. By contrast, the rich trade their time AND money to acquire more assets. The rich value the asset more value than money.

Most financial advisors are salesmen

A relationship works best when both parties are in alignment.

Wal-Mart provides is darndest best to provide low prices for every day goods. People go into Wal-Mart wanting low prices.

Google provides a search engine that delivers your search criteria. You goto Google to type in your search criteria without getting bombarded with unwanted ads.

However, in the world of financial advising and politics, it's not exactly working out that way.

You go into a bank expecting to receive financial advice for your best interest. However, on the other side, the financial advisor wants your money for his best interest. In other words, he'll gladly take anyone's money and buy and sell as many securities as possible so he can make comissions.

You vote for the poilitician hoping that he does his best to vote for fiscal responsibility. He promises that yet has a hidden agenda that is geared towards lining the pockets of special interest groups rather than for true fiscal responsibiities for tax payers.

Financial advisors and politicians are not aligned with their target audience. People know and sense that they are actually sales men. They say anything they want to get your favor. In the meantime, what you want is not actually being delivered.

The best relationship is aligned to help the same person. If it's not, there is a tragic flaw and the market will eventually gravitate to something else.