The Growing Bubble in Gold Bubble Theories

A rising gold price, or a falling price of cash? And what Google Search data says about people’s attitudes to gold

Is gold in a bubble? The yellow metal is hitting new record highs. equities, housing, and other commodities – are still far below
Prices are up some $350 since last year. Granted, the value of the their record highs. Therefore, they say, gold is acting abnor-
metal is moving up fast. But we at the PollittBuro think that it’s mally, and as such it must be in a bubble. But here they are
too easy to call “bubble!” on an asset just because it happens to be wrong, for there are actually many markets hitting record
leaping to new highs. For centuries – as long as monarchs and highs. Housing markets in Canada, Australia, Norway, Finland,
central bankers have monopolized the supply of money, and Sweden, China, Singapore, Taiwan, Hong Kong and a number
done a consistently poor job of managing it – the prices of things of other countries have broken or are nearing record highs. A
(commodities, assets, goods) have been periodically hitting new number of emerging equity markets including Sri Lanka, Phil-
highs. Put differently, the price of money, whether it be in the ippines, India, Indonesia, Argentina, and Mexico have recently
form of coin, paper, or electronic bits, has been regularly hitting broken to record highs, and Brazil, Korea, Israel, and Malaysia
new lows. After all, the mirror image of any item’s price is really are a hair’s breadth from their records. Several base commodi-
just the price of money. ties are at or near record highs, including cotton. The CRB
Textiles Index, which includes not only cotton, but also bur-
With gold hitting $1350, most have described this event as a
lap, print cloth, and wool just broke its last peak dating back to
record high price in gold. We only point out that it may also be
1995. Coffee hit 15 year highs in early September. Last week
seen as yet another decline in the value of money to record lows. It’s
rubber prices hit new records. Other more esoteric indexes we
tough to determine whether it is the qualities of gold that are
track including the Live-Ex Wine Index and the impressionist
driving its price higher, or if it’s the properties of money and the
and modern components of Mei Moses Art Index are also at
desire to offload it that are driving money’s price lower, or some
record highs. Lastly, in Canada (and probably the rest of the
combination of the two. Each asset – gold and money – has its
world) consumer prices for fruit, vegetables, transportation,
own set of underlying fundamentals. So if we are in some sort of
and tobacco continue to hit new highs. So is gold an odd duck?
bubble… is it actually a gold bubble, or a reverse-bubble in
Not at all. Rather, money seems to be continuing its long and
money?
rather lonely decline.
Remember that money – whether it be dollars or pounds, coins
Of course, a bubble theorist will tell you that the issue is more
or paper – has been in a bear market for centuries. That it has
complex than record high prices. So what is a bubble? Usually
fallen to yet another low relative to gold is just a reversion to the
an asset’s price is well-anchored to underlying economic reality
long-term trend. The error of those who describe $1350 gold as
by a sound set of foundations. The bubble process begins when
a bubble is that bubbles by definition are unsustainable oddities
people substitute a previously sound set of foundations with a
that are destined to dramatically reverse themselves. But gold
new set of foundations. These new foundations are optimistic
near record highs, and money at record lows, is a historical regu-
in nature, forward looking, and imaginative. A bubble can’t
larity, not an abnormality and, as such, the current market is
emerge if only one person adopts these new foundations. It
probably on firmer ground than the bubble theorists might have
requires ever larger numbers of believers to continue expand-
it.
ing. Price increases confirm believers’ optimistic expectations,
Bubble theorists like to point to the fact that the only asset hitting resulting in a reflexive process in which higher prices attract
new highs nowadays is gold, and that almost everything else – more believers which cause higher prices.
We’re not going to debate whether today’s gold price is di-
vorced from the underlying fundamentals. Instead let’s debate
the second aspect of a would-be bubble – the idea that ever
larger numbers of believers are needed to drive a bubble
higher. If it is the case that gold is in a bubble, it should be a
fact that the gold meme is occupying the thoughts of a growing
proportion of the world’s citizens.
Now that’s a gold
bubble!: Ascending It just so happens that we have a tool by which to measure what
Chilkoot Pass, Yukon is on people’s minds. Google Insight for Search tracks how many
Gold Rush. 1896. searches have been done for a particular term relative to the
total number of searches done on Google over time. Google
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(Continued from page 1) bubble. Not yet.
The idea that gold is in a bubble has been spreading fast. Last
makes this information available to the public. Having played a bit
December Nouriel Roubini penned an article entitled “The Gold
with this tool, we show our findings below. The first chart tracks
Bubble and the Gold Bugs.” Later, in January, George Soros
the number of searches for what we assume to be the most single-
would say that: “the ultimate asset bubble is gold.” The gold
minded search terms employed by would-be gold drones caught
bubble idea has since become daily fare in the financial press
up in a bubble: “Buy gold” and “gold price.” We have averaged
and blogs. Our second chart plots the gold price against the
out the data from these two searches into one data series, on top
search term “gold bubble.” As one can see from the movement
of which we overlay the gold price.
of this curve, it was in early 2008 – when the metal broke its
In general, a rising gold price is correlated with growing searches old 1980-era peak – that the idea of a gold bubble started to
for “buy gold” and “gold price.” Peaks in gold prices coincide with come into vogue. Google searches for “gold bubble” idled until
peaks in interest in buying gold. We assume that there is an inter- the fall of 2009, only to explode as prices surpassed the $1000
action between these two – higher prices drive interest in buying, mark. The idea of a gold bubble has since gained wider cur-
and interest in buying drives higher prices. rency on the metal’s rise to $1350. Which leads us to won-
der… where is the bubble? In the price of gold, or amongst the
What is apparent is that the recent jump to record highs has not
gold bubble theorists?
been accompanied by the sort of search data that one might have
expected given previous reactions. The early 2008 peak, the Oc- Our analysis doesn’t mean that gold is going to continue rising,
tober 2008 Lehman collapse, and the late 2009 jump attracted nor that it is set to retreat. All it means is that gold’s rise might
much more curiosity than the present jump, with search activity be better viewed as a continuation of money’s steady decline in
expanding in line with price. Which leads us to believe that the value. As such, price strength is not as abnormal as most com-
current 3 month-old bull market from $1150 or so to $1350ish mentators are making it out to be – it is a reversion to trend.
has not been driven by a wave of buying by gullible dentists, Furthermore, according to our reading of Google’s search data,
grandmothers, and taxi drivers, but a rally led by insiders. If bub- the “buy gold” meme has not reached the contagious propor-
bles are generated by hoards of novice buyers, then this isn’t a tions that might qualify it as a bubble. Probably best to only
begin worrying about an actual bubble when searches have at

John Paul Koning Toronto, Ontario

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