Did the Gold Bubble Burst Today? If so, it's Likely to Reinflate

At the time of writing gold is heading for its largest drop in almost a year. Could this be the first sign of a gold bubble popping?

At least one blog, The Mess That Greenspan Made, believes that if gold is in a bubble that can pop, it’s one that will reinflate again afterward. In order to explain, it compares the last three upward movements in the price of gold to its current trend:

“… some quick math reveals that the 2005-2006 move from just over $400 an ounce to $725 was a gain of some 70 percent and this occurred during a relatively calm period when central banks were still selling their gold reserves as fast as they could and the entire world still thought it was getting rich due to rising asset prices.

“The 2007-2008 jaunt from the high $600 range to just over $1,000 was a surge of about 50 percent which took a few months less to accomplish than the prior move. This occurred when there was growing fear of inflation but the sustainability of the global financial and monetary system was not being widely challenged as it is today.

“Depending upon how you measure it, the most recent move only amounts to about 30 percent, though you can surely get a larger number if you start the measurement in late-2008 when the entire financial world looked like it was in the process of imploding…”

The commentariat is riled up because gold is making new highs in nominal terms. However, compared to previous upward movements the current gold “bubble” hasn’t yet had a huge swing to the upside on a percentage basis.

The article also looks at how the gold “bubble” behaves when compared to other bubbles:

“Normally, after a bubble reaches its maximum point of inflation and pops, it stays popped and doesn’t begin to inflate again for many years or even decades – think Nikkei stocks in 1989, Nasdaq stocks in 2000, and housing in 2005. None of these bubbles show any real sign of inflating again…”

This second point is that the gold price has consistently regained its footing over the past decade even after it pulls back from a relatively quick run up in price. This characteristic makes it very much unlike other previous asset bubbles.

According to the post, “If this is a gold bubble, it’s unlike any other bubble that I’ve ever come across because it keeps happening over and over.”

More details, and four very insightful charts, are available from The Mess That Greenspan Made in its post on the recurring gold bubble.