Gold’s price per ounce started to rise in 2008 in lock step with the economic throes of the so-called Great Recession. While there have been a few minor hiccups from time to time, gold’s value still remains at near historic highs.
Of course, this begs the questions “When Will The Gold Bubble Burst?” Over the course of the last two decades, we have seen other economic bubbles rise, grow, and look to remain strong forever. Only to watch them burst suddenly when the economic winds of change, sweep in another direction. Two of the more well-known events in recent memory include the Tech Bubble Burst and the Real Estate Bubble.
Both of these events were of course linked to things like industry competition, changes in the market, and other broad financial trends. Yet when those bubbles burst it had a profound effect on the United States Economy as well as other reverberations around the world.
This leads a lot of people to speculate that gold’s bubble will one day do the same thing. Yet there are many experts in the investment world and gold-related industries who argue against this fear. These proponents argue that unlike real estate, tech, and oil, gold has a minimal amount of fundamental value related to its realistic price
Gold differs from other investments in that its value is not completely based on its contribution to global economic production. Human beings need homes to live in. We also need oil for gasoline and diesel to power our vehicles. Technology and the internet are now critical components of everyday businesses. This means that the value of these stocks is largely influenced by how they contribute to our way of life, as well as the industries that represent them.
Yet aside from its use in some consumer electronics, gold is primarily used in luxury items. It’s estimated that around 52% of the gold mined each year is used in some form of jewelry. Other industries like electronics use around 12% of the annual mined gold. While an estimated 34% of mined gold is used for things like official government holdings as well as investments. Recycled gold from outdated or disposed of electronics makes up a negligible margin at this time, but some speculate that it could also serve to increase the amount of gold available on the marketplace in the future.
Some analysts in the field speculate that gold’s intrinsic value can influence what is called The Madness Of The Crowds or Crowd Psychology. One theory of reflexivity in this process starts to shape perceptions of an asset’s value. If it persists it can lead to a loop process where price increases also serve to shape perceptions. This means that as the price continues to rise, so do its fundamentals. A feedback loop of this magnitude can even become self-sustaining. If the bubble continues to inflate until it becomes increasingly unsustainable. As it continues to grow spiraling prices drive even more interest. When the inevitable collapse does come it is even more devastating.
The price of gold increases more than just about any other commodity, largely because people think it will. Many investors feel that gold is a very good hedge against inflation and other economic trends that can affect their overall wealth. This means that as inflation increases more and more people buy gold. Yet, there are no fundamental reasons that gold’s value should increase, even when the dollar falls.
Did Gold’s Bubble Peak In 2011?
Until the gold standard was abandoned in 1973, gold’s price per ounce was relatively locked at a stable $35. When President Nixon abolished the Bretton Woods Agreement, he essentially took the United States off the gold standard. Since that time, investors have bought gold for a variety of reasons. However, there are three that stand head and shoulders above the rest.
Reason Number 1:
Gold helps hedge against inflation. Typically, as the dollar declines, gold still holds its value.
Reason Number 2:
Gold is often seen as a safe haven against economic uncertainty. Allowing people to insulate their wealth during a massive economic disturbance like a recession or a depression.
Reason Number 3:
Gold can hedge against stock market crashes.
These three reasons all played a role when gold reached its previous peak in 2011. At that time, many savvy investors were concerned that the United States Congress might not raise the debt ceiling which could potentially have caused the United States to default on its massive national debt.
While many people are aware of Gold’s rapid increase in value in 2008, the trend actually started back in 2000. At that time many investors were reacting to the perceived Y2K crisis of 1999 as well as the Tech Bubble bursting in 2000.
This economic uncertainty only caused a greater surge in gold prices after the terrorist attacks of September 11th, 2001. The dollar then continued to decline in value between 2002 and 2006 which raised even more fears about inflation. These factors drove many investors into gold as a safe haven. When the 2008 financial crisis hit many of these savvy investors bought more gold, especially when the Federal Reserve’s program of quantitative easing boosted even more inflation fears. Then, in 2010, many investors were worried about the economic impact of the Affordable Care Act, while the economy was still growing sluggishly.
Yet by 2012, a great deal of this economic uncertainty had vanished. By that time economic growth had stabilized at a healthy 2.5%. By 2013, the stock market managed to exceed its prior record set back in 2007.
Is Gold Due For A Massive Fall?
On a technical level, gold’s price per ounce can’t fall below the cost to mine it out of the Earth. This can be influenced by various exploration methods in niche mining industries like plaster mining, hard rock mining and more. Still, with all these factors taken into account, the projected worst-case scenario is that gold prices won’t fall below $500 per ounce.
What Could A Potential Gold Bubble Burst Mean For You?
Gold prices rarely rose above $500 per ounce between 1979 and the year 2004. Yet it’s historic highs was propelled by the worst recession since the Great Depression. Now that the United States and most of the world economy has stabilized, gold prices should return closer to their historical level, which lies somewhere below $1,000 an ounce.
At the same time, many planners and financial advisors recommend that gold should still comprise around 10% when you rebalance your portfolio. If you happen to be holding more than 10%, then you might want to talk to your financial adviser just in case gold falls again.