Bubbleomics: Is Gold About To Pop?

Of course seven down days does not signify a bubble popping. And so what if Gold is down 8%? Jim Rogers says it’s going to $2,000 and soon, so a bit of a pullback from time to time is normal. That’s the stuff, “Buy the dips Boyo!”

And in any case we are reliably informed by Dubai-based bullion analyst Mark Robinson that “China wants the gold prices to crash because “the Chinese central bank wants to buy the IMF gold below $1000 ounce.” That explains why they recently warned of a gold bubble.

The reality of course is that China wants to amass 10,000 tons of gold and take over the world – now there’s a conspiracy theory with legs! Only China isn’t buying gold, so much as preventing local miners from selling it, I wonder how much the Chinese government is paying their miners for the gold?

I was interested to watch an interview with Andy Xie on the FT site the other day, he’s an economist based in Shanghai and I watched about an hour of recording without noticing anything that didn’t make sense to me, which is unusual when I listen to economists. If you want to understand China, I would strongly suggest listening to what that guy has to say.

One thing he said was that China is in a state of shock about how the US government seems to be so ready to trash the Dollar, because since as long as everyone can remember the Dollar was THE currency, that’s why the Rembini and the Hong Kong Dollar, and the Singapore Dollar are pegged to the US dollar, it’s not some conspiracy to sell cheap toys and DVD’s to USA, it’s because traditionally in Asia, and it’s a traditional sort of place, the dollar was, well the dollar.

So sure, I imagine China is buying gold, what else would you have them buy? US Treasuries, there at least I agree with Jim Rogers who says that they are a bubble in the making, and one of these fine days, prices are going to go down (i.e. yields are going to go up).

My position on gold (which I have been mercilessly lambasted for), is that as far as I can see the best predictor of the price since 1971 when it was “freed” by President Nixon, is the price of oil.

Using average annual data up to end 2008 a plot of the price of oil against the gold price explains 74% of changes since 1971. OK that’s not proof, but there is a logic there which is that oil is (currently) indispensible for the functioning of modern economies (it’s the only thing that you can use to power transportation), so logically the price of something else that fundamentally holds value over time, should track that price.

Well oil prices appear to be pretty much in the range $65 to $85 these days, which suggests that once the exuberance of the gold-bugs is put to rest, the “right price” for gold is in the range $675 to $823.

Unless of course China takes over the world’s reserve currency, which is of course an option. But there again they don’t seem to be that keen on the idea, they would much prefer if USA just stops trashing the dollar.