The last update was given on Dec 2010. It was a rather comprehensive essay on why I am bullish on gold and silver. Also given in this blog was two of the favorite stock for gold and silver. Both Goldcorp and Silver Wheaton have done extremely well.
With gold and silver rising to historic level, are we hitting a bubble? Am I still bullish?
Lets examine some of the the macro perspective:
1. Inflation
Inflation is becoming more obvious now. I will be writing an extensive update on inflation in my next post. Inflation is good for the precious metal. It is a fantastic hedge against inflation.
2. Debt and deficit.
Listed top reason for the rise of gold in my previous update is the devaluation of the dollar, increasing debt and widening deficit.
Debt to GDP is now 3.8 times GDP. This is equal $180,000 in debt for every man. There is no way US can repay the debt.
Recently, Bill Gross of PIMCO - manager of the world biggest bond fund sold all treasury and went short against it.
He is even more pessimistic. He said recently that the US true debt is $75T, which is 500% of GDP ( includes unfunded liability medicare, pension etc ). Interest alone is equal to the full budget of the country. It is like a man has so much debt that his entire salary cannot service even service the interest payment. Technically, US is bankrupt.
o Technical picture
Technically, gold and silver had broken out last week after a period of consolidation and multiple tops for the last 3 months. Today, we witnessed some profit taking. But gold should meet support at 1440 and silver at 39. If held at this level, I plan to add to my positions. I see gold above 1500 and silver above 50 in a short term if the supports hold verifying that it is not a fake breakout.
o Dollar is breaking down
The dollar is at a very dangerous level now. If broken down below 75, it will accelerate down quickly to 72. Gold will continue to rise exponentially.
o Investing public and funds holding gold still small.
The big question is whether gold is a bubble. Yes, there is more public awareness now but it is far from being a bubble.
Gold as a percent of financial asset is increasing but still far from historical levels.
Despite rising from under $1,000 an ounce to over $1,420 over the past six months, that represents only a 0.7 standard deviation move for gold prices, according to Credit Suisse (CS). The average standard deviation move of other bubbles—Japanese equities in 1986, the tech boom in 1999, the GSCI in 2005 and gold in 1979—is 5.3. Gold’s 180 percent move in 1979 represented a 10.3 standard deviation move, more than 14 times the magnitude we see today.
Eric Sprott recently did a fascinating presentation explaining how underowned gold is as an asset class. Sprott wrote that despite a 30 percent increase in gold holdings during 2010, gold ownership as a percentage of global financial assets has only risen to 0.7 percent. That’s a big increase from the 0.2 percent level in 2002, but Sprott points out that it’s misleading because the majority of that increase was fueled by gold appreciation, not increased level of investment.Also reported by Dr Marc Faber is that percent of gold to pension fund is still minimal.
Silver was down today mainly because one trader made a huge bet of $1m on options that it will drop 37%. Thus no reason to panic for the drop today.
In closing, I like to add a quote from Alan Greenspan. He is the father of the bubble in the US. But there was an interesting quote from him:
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value... The financial policy of the welfare state requires there be no way for the owners of wealth to protect themselves. |
Gold is a good hedge for inflation and devaluation of paper currency
Fundamentals has not changed. It has actually got stronger by the month.
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