Just want to get the ET view. It seems everyone I meet who doesn't have much of an economics background thinks it is a bubble, while those who do don't think it is fairly valued. (Note: Today, gold hit all time high in euros)
How about an overvalued asset that has the bulk of its price movement fueled by speculation that it will 'rise forever.' (or some variation thereof) Credit fueled price ascent can't hurt. What is tough about valuing gold on a production cost basis is that a large part of the marginal cost is land cost. And inevitably, part of those costs being inflated is based on the selling price of gold (you see the self reinforcing feedback mechanism here? Gold goes up to $2000/oz and for a newly entering miner, he'll pay the bulk of his production cost in the form of 'scarcity rent'). Oil, etc. suffers the same valuation characteristics. But the fact scarcity rent seems to be correlated to money supply expectation and actual scarcity definitely lends fundamental support to current price.
The problem is intangibles such as flight into metals out of fear, impending currency turmoil, more and more debt, etc. I vote.....not yet.
If the supply curve for gold (or oil etc) were price elastic, I imagine there would be no room for such a risk premium.
This is the conventional wisdom regarding the definition of an asset bubble. The problem is - how do you know when an asset is overvalued? Who decides it's over valued? If all of these "speculators" are willing to pay the high price for the asset, isn't that the value of the asset? Which leads to my next question - how does one know if the person buying the asset is a "speculator". Isn't anyone that buys any asset a "speculator"? Surely, the buyer of the asset is "speculating" the value of the asset will increase (or at least not decrease). Asset "bubbles" (as some like to call them) are only confirmed after their values crash. Impossible to tell if an asset is overvalued otherwise.
I'll add some of my own anecdotal observations. During the tech boom, just about everyone I knew owned tech stocks. It was a frequent topic of discussion. During the housing boom, many of my friends and relatives bought homes and we frequently discussed the rising home values. We were not speculators, we were just at that right age to buy a home, late twenties to mid thirties. Luckily, we all bought prior to 2004, so we didn't hit peak. Three years ago, I was telling my friends that the days of bubbles are over, that maybe gold may be a good investment. That maybe all this wealth we see around us is illusory and credit bubbles do not end well. They all thought I was nuts. None of them, aside from their wedding bands and wive's jewelry, own gold. Out of 30-40 people I can think of, NONE OWN GOLD. And most still think this is a short term recession. Another story: I recently visited my parents. Previously, my mother said that she noticed a cash for gold kiosk opened at the local mall. She had an old bracelet that was scratched, so she asked for a quote. They said they would give her $200.00 for it. She didn't need the money, was just curious, and declined to sell it. I remembered that story so I brought a stamp scale the next time I visited my parents. I asked to look at that bracelet. It was 18K gold, which is 75% gold content. I weighed it at 1.1 oz. Melt value of that bracelet was at least $800.00. Remember, they offered her $200.00
Good stuff. I think there is a bubble-calling tendency becoming embedded into our society. First tech stocks, then houses... everything ascending in price therefore must be a bubble, right? Twice burned makes a very skeptical investor/saver. Everyone wants to outsmart the prevailing consensus, which usually burns them. I can't help but think, all fundamentals aside, that murphy's law is the only one that prevails in the end. And with record treasury/bond flows (essentially cash / cash-like investments) and equities and tangible assets badly regarded in comparison, I can't help but think the outcome will be worst for the most. And as you said, 'the most' aren't buying gold or silver - they are buying cash.
I truly believe the DOW and Gold will reach parity once more and have invested accordingly. I don't attribute any special characteristics to the metal or anything like that. I'm not smart enough to really understand TA, stock or credit analysis, options or calls... All I have is a big interest and a little knowledge in history which as the saying goes doesnt repeat but it often ryhmes so I decided to take the leap. So far so good.