In an effort to find some blossoms in a desert
"No Tulips Here. In his February "Markets at a Glance" piece, Eric Sprott added some light and perspective on the gold bubble myth. According to Sprott, speculative bubbles form when prices for an asset class rise above a level justified by its fundamentals. For this to happen, increasing amounts of capital must flow into the asset class, bidding it up to irrational levels. While gold may be trading at all-time nominal highs, Sprott says investment flows prove that it isn't anywhere close to being overbought - the world holds about the same portion of its wealth in gold as it did over two decades ago. He goes on to say that gold is actually a surprisingly under-owned asset class - and one that has generated far more media attention than it probably deserves. Gold simply hasn't commanded enough investment to warrant the bubble fears it seems to have aroused among some of the market's talking heads. The truth about gold is that most people simply don't own it yet. Sprott highlights that
since 2000, new investment into gold only amounts to 0.1% or about $250 billion. To return to a meaningful level of gold investment, say to the 5% level of 1968, Sprott says it would require over $9 trillion of gold investment today, or about 6.5 billion ounces of gold at the current gold price. Not only is Joe Q. Public underinvested in gold, at current prices it isn't even possible for him to increase gold holdings back to meaningful levels. Sprott concludes that the notion of a gold bubble is patently false. Investors are not participating in any speculative bubble by owning gold, they are merely safeguarding their wealth."
