Gold & Silver: Are We in a Bubble?

by Wes Bridel on October 26, 2011

in Stewardship

Gold and Silver prices have grown dramatically over the last year when compared to fiat money such as the US Dollar.  We’re continuing a series that began here.  Fortunately, I believe we are still fairly early in the so called “bull market” of gold and silver.  There are 3 phases of a bull market, the “stealth phase”, the “Wall of Worry” phase, and the “Mania” phase.  We were probably ending the “stealth phase” around the time this matter was first broached by the board.

The wall of worry phase will probably continue for an extended period of time, however that will be determined by economic events transpiring throughout the world.  During this phase, every concern and doubt around the world will be overcome.  It’s popular in the financial press today to talk about the all time high valuations in gold (although silver is still significantly below it’s all time nominal high and nowhere near it’s all time high in real terms).  This ignores real, inflation adjusted terms,  the historic banking and sovereign debt issues faced throughout the world, and the fact that no fiat currency in the history of the world has ever lasted 50 years and the US Dollar is extremely long in the tooth at 40 years, among many other facts.  Here one interesting article along these lines… http://www.bloomberg.com/news/2011-09-15/gold-backed-dollar-signals-10-000-metal-price-chart-of-the-day.html

Those that say we’re in a gold “bubble” have no real understanding of what a bubble is.  In a bubble, people everywhere are not calling it a bubble.  Please instead are talking about the fact that you simply can’t lose money in this market because it always goes up.  In the late 90’s we were told that the internet had produced a new reality that made the old rules no longer apply and everyone owned internet stocks.  In the mid-2000’s, we were told that real estate always goes up and you can’t lose by owning property and you probably know several people who got into the house flipping business.

On the other hand, hardly anyone today owns gold and silver.  The percentage of financial assets today is tiny in comparison to both normal historical standards and particularly to market peaks.  This “bull market” will end in one of two ways.  There will either be a blow off mania phase where the price goes far beyond what most anyone considers possible today.  This would be the point to sell out.  It’s impossible to pick the top, but this event can be watched for.  If that is the case, the world will either have solved it’s massive debt and currency printing problems or will replace the current currencies with something new (perhaps a new one world currency) that they are able to convince the world is finally secure.

The other possibility is that the same thing that has happened every single other time in history happens again.  That fiat currency fails and is replaced by a gold or silver backed currency.  This always happens, so it would be foolish to not see this as a likely scenario.  If this happens, then there will be no bubble bursting, but instead a leveling out of value as gold &/or silver become the preferred currency of choice by everyone.

This is the 5th post in a series on silver and gold.  You can find all posts from this series at:  1) Gold & Silver on Sale, 2) Reasons to Buy Gold & Silver,  3) Gold & Silver: About to Take Off?,  4)  Why & How to Buy Silver & Gold?,  5) Gold Bubble?,   6) Gold Speculators or Savers?,   7) Gold Article Rebuttal, &  8)  Gold Rebuttal Pt 2.  Watch the previous economic update video series we did at: 1)  Europe Economic Update 1, 2) Europe Economic Update 2, 3) Europe Crises Explained, 4) World Economic Update, 5) US Economic Update,  6)  US Economic Update 2,  7)  US Economic Update 3,  8)  Hyperinflation Signs,  9)  Hyperinflation, Inflation, or Deflation?,  10)  Gold Update,  &  11)  Gold & Silver Update.

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