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Why gold is not a bubble

March 15, 2010
Pattaya, Thailand

I was laying in bed sick recently watching Conan the Barbarian… yes I admit it. Some people eat chicken soup, I drown myself in cheesy Hollywood violence.

If you haven’t see it, you’re not missing much of a plot– Arnold Schwarzenegger at his physical prime wields a big sword and searches for treasure to plunder.

As I watched the Governator decapitate his foes two at a time, I couldn’t help wondering if this was the image that Nouriel Roubini had in mind when he called gold a “barbarous relic” in the highly publicized tit-for-tat argument he was having with Jim Rogers…

In blasting gold and gold bugs alike, Roubini indicated that gold is a new bubble waiting to burst, and that the idea of $2,000 gold is merely speculative fantasy.

To be clear, I am not a gold bug… but I’ve found Roubini’s comments to be off-the-mark. How can there be a gold bubble without widespread gold mania? Wait until the shoeshine boy is having conversations with his customers about Eagles and Maple Leafs… that’ll be a clear sign of mania.

With all the ‘Cash for Gold’ locations I’ve seen sprouting up all around the world, we may be in the very early stages of developing this mania, but for now, the vast majority of people still don’t own a single ounce.

The chief problem with gold is that there is no reasonable way to value the metal, so it will be impossible to quantify when the metal finally has reached bubble phase.

Sure, there are a plethora of technical indicators and moving averages to consider, as well as a comparison between the market value and its production costs… but there is no clear means to define a clear price for gold.

As an example, you can value the balance sheet of a company against very clear, quantifiable assets– cash on the books or dividend yield for example– and determine if the company is undervalued or overvalued.

There is no similar approach for gold… and this makes direct pricing predictions the stuff of wizardry and good headlines.

My suggestion is that, if you want to speculate in gold, it’s probably better to buy shares of gold mining companies instead, which have audited assets and earnings to evaluate.

I view physical gold, on the other hand, much more like a form of cash instead of a speculation… a form of cash that is totally private, uncontrolled by any central bank, and to be used in emergencies only.

To give you an example, I have a euro bank account.  I don’t watch the euro spot price all day, buying/selling the currency based on its fluctuations against the dollar and constantly recalculating the accounts value in dollar terms.

Rather, I only care that the bank holds on to my euros and that I can access the funds to buy things priced in euro. If I have 100,000 euro in the account, I look at it as 100,000 euro, not whatever value it has in dollars at the moment.

I look at gold in the same way. I accumulate gold as money, and I even travel with a bit of it just in case I wake up one morning and find that the global financial system has completely collapsed.

(when you travel as much as I do, this is the best insurance policy, along with a second passport…)

The other benefit to me is that there are no reporting requirements, and no unpaid government spies that snoop over what I’m doing with my ounces. This form of financial privacy is definitely worth considering.

In terms of market value, though, I do not pay much attention to the fluctuations of the gold price in dollar terms, up or down.

I will not cheer if it hits $1,500, nor will I cringe if it drops below $1,000. Just like my other foreign currency holdings, the value of my gold in dollar terms has little significance… besides, obsessing too much about its dollar value defeats the purpose of accumulating gold to begin with: having a private alternative to the dollar.

Tomorrow I’m going to talk about a unique way to buy gold, write-off the storage costs, and hold it overseas in a tax-deferred or tax-free vehicle.

Stay tuned.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • Tom

    I agree with Mike Shedlock that the price of gold fluctuates roughly in an inverse manner to the public’s confidence in government and has little to do with inflationary or deflationary expectations. When confidence is low, gold rises and when confidence is high, gold declines. It appears to me that gold has a long run up ahead of it but that the best way to play it as a speculation as you suggest is in mining stocks.

  • REx

    Hi Simon and company,

    Due to a glitch and computer crash I was unable to save the second residency information that was sent out on or around feb 24th. I have the first one but was unable to save the second one, is there anyway you can send me the citizen 2nd passport info again, thank you.

  • J. Gen

    I couldn’t agree with you more, Simon. It’s just great to hear confirmation from someone whose posts I hold in high regard. Gold is definitely still undervalued with mountains of evidence to validate this. I was curious as to what your thoughts are on Silver? There are so many resources claiming that this metal is possibly a better investment since silver is both a precious metal as well as industrial. According to many sources, silver scarcity in relation to ETFs is a possible contributing factor to silver’s extreme undervalue.

  • ace

    Actually, the “Cash for Gold” trend is a sign of public selling and dealer buying. It is more like a bottom than a top. When dealer’s start advertising “Gold for Sale”, look out below!

  • Alex

    There is one thing that I have a hard time reconciling. Do I want multiple flags? Absolutely.

    But for every country I have an interest, there are roadblocks. Residency is the least of the issues.

    Moreover, I am perplexed by one thing that is very definite. This should not be ignored. If you pursue a second passport, you are legally obligated to surrender your passport. Here’s the source: http://travel.state.gov/travel/cis_pa_tw/cis/cis_1753.html

    Here’s the fact: a person who acquires a foreign citizenship by applying for it may lose U.S. citizenship. In order to lose U.S. citizenship, the law requires that the person must apply for the foreign citizenship voluntarily, by free choice, and with the intention to give up U.S. citizenship. Intent can be shown by the person’s statements or conduct.The U.S. Government recognizes that dual nationality exists but does not encourage it as a matter of policy because of the problems it may cause.

    Either you become an outlaw, or the buraeucracy is so slow, they just haven’t gotten around to people like Simon yet.

    Given these facts, if the average person is pursuing multiple flags, they must be prepared to commit ALL THE WAY and possibly be a citizen of that country forever.

    If any of these premises are wrong, let me know. I would LOVE to get a second or a third, but it is not looking good.

  • http://www.freewholesaleinsiderinformation.com Gina

    Good food for thought Simon. I looked at gold but decided silver rounds and bars fit my current situation better (for some reason it’s ignored when traveling, as if they were piggy bank change). Would you recommend the same strategy for silver as you offer for storing gold?

    Thank you for the insight.

  • Mark

    Simon – have you ever needed to use your emergency travel gold, or do you have any stories from other world travelers who have that you can share? Or have you (or others you know) ever made a larger barter transaction with the gold you are building up, or are you mainly saving up in case of a fiat money meltdown? It’s hard to imagine a world where no one is accepting paper or plastic anymore, but I can see gold’s value looking historically at countries with periods of hyperinflation. I don’t know how good I would be bargaining on a fair weight in gold (with indivisible bars or coins) as a price for a good or service.

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