Bubble: Are We There Yet?

With new records being set every day, there seems to be as many non-believers in gold as there are believers. We tend to see the gold market in a different way as current and future believers in gold.

One firm that has a feeling the end of gold’s bull run is near is Macquarie. It is forecasting gold prices to average $1,100 an ounce in 2011, roughly 15 percent below where prices are now.

The firm argues that the current bull market is now three times longer than the average in terms of years and the two main factors that have driven prices over the past decade—growth in foreign exchange reserves and investment demand—have already peaked.

Macquarie does offer one caveat to its bearish prediction, however. If central banks become big buyers, that could be a catalyst for higher prices. We’re seeing the first increase in central bank holdings since 1988 this year so it depends on whether central bankers continue to diversify their reserves away from the U.S. dollar.

Deutsche Bank offers a much rosier outlook. The firm says that gold needs to surpass $2,000 an ounce in order to achieve “official” bubble status. One reason it cites is that gold prices haven’t run too far ahead of the rest of the commodity pack.

This chart shows the relative price of gold versus crude oil and copper. You can see that when oil started to approach bubble status in 2008, the gold-to-oil ratio was at its lowest level since the early 1970s. The gold-to-copper ratio bottomed a little earlier but also reached levels not seen since the 1970s.

Right now, we’re roughly in the middle range of where both ratios have been for nearly 40 years. One ounce of gold is approximately worth 16 barrels of oil and 0.17 tonnes of copper. In order to reach extreme status in relation to oil and copper, gold would have to reach $2,890 an ounce and $2,100 an ounce, respectively, according to Deutsche Bank.

We maintain our bullish stance on gold for a number of reasons we’ve previously discussed, but a key factor is that governments in the U.S. and Western Europe are deeply entrenched in fiscal and monetary actions that will grow money supply and increase deficit spending. We don’t see that changing any time soon.

About Frank Holmes 264 Articles

Affiliation: U.S. Global Investors

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.”

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Visit: U.S. Global Investors

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