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Deflating the Theory that Gold Rally Is a Bubble

By David Skarica   |   Thursday, 16 Sep 2010 09:21 AM

Many of us gold bulls have taken solace in the past week as gold has performed very well, soaring to new highs.

In the last few months, we have heard numerous so-called experts calling for gold declines and pullbacks to below $1,000 an ounce. These culprits will remain nameless for the purpose of this article.

There seems to be a debate in the financial media at the moment if gold is a bubble. We must remember that bubbles are rare events. They usually happen once or twice in a generation, with the real-estate and tech markets seeing bubbles in the past 10 years. Because of those two instances, we are now all too quick to declare every bull market a bubble.

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One aspect of a bubble is that a market trades to a ridiculous valuation. If you look at gold and adjust it for inflation, you will see that gold’s 1980 high of $850 an ounce would be near $2,400 in today’s terms. So gold is still about 50 percent below its inflation-adjusted high. In addition, at a major top in gold, it usually takes only about 1 ounce of gold to buy one share of the Dow Jones Industrial Average. Right now it takes 8 ounces. This tells us that gold isn’t that expensive.

We are also entering the seasonal strong time-frame for gold as gold tends to be strong in the fall.

With massive money printing in the U.S., huge deficits as far as the eye can see and no political will to cut these deficits, I wouldn’t be surprised to see much higher gold and gold-stock prices in the coming years.

About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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