Saturday, February 09, 2008

Is Gold Building Up To A Bubble?

Much of the appreciation for gold comes from the East, places like China where the people know gold not only as jewelry but also as "the" store of value.

Other nations are beginning to wake up to the insufficiencies of fiat (i.e. unstandardized paper) currency, if we are to judge by gold's recent price levels (over $900 an ounce and equally as high in all currencies).

Perusing through some nice Wall Street Journal video clips, I found this one about China's love for golden effigies of their yearly animal. This year, it's the rat, and so you get this:

goldrat
[Thanks to the Wall Street Journal and Reuters for the photo. See the video called "Gold Rats for Sale" here. Be sure and change the tabs at the top for more choices.]

With the dollar's continued devaluation the gold price should be going upwards even more, unless the Federal Reserve Governors start making noise like they want to stop the printing presses, and I'm not holding my breath until they do.

But you see, that's the problem with living out your self-aggrandizing fantasy: Once you take the job of Governor of the Federal Reserve Board (never mind Chairman), you have to act like you know what you're doing, even though this is scientifically impossible.

The Fed Governors' reaction? Do what your buddies suggest you do, no matter if your Wall Street and former Fed-chairman friends are actually your enemies.

Our government legislators are in the same predicament. Their reaction to this uncertainty? Do what feels good. Send checks to voters, even though the money is just more debt the taxpayers will have to reimburse at some point in the future.

We may see a change in the euro-dollar rates over the next coming months, as the European Union caves in to pressure from the dollar's weakness and from discord in their internal bond markets. But I doubt you'll see much change in the dollar-gold ratio for a while yet.

We still have a long way to go to get our heads out of the water in this housing/credit maelstrom, in reaction to which the government and its agencies (like the central bank) will continue to overreact, making a bad situation worse. (For more, see this post.)

I suggest that some economics wonk check out this Sybilian conjecture: In a fiat environment with legal private holding of gold, gold has always been and will probably always be the last bubble before any semblance of sanity returns.

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