Tuesday, October 26, 2010

Gold in a Bubble?


An interesting post from MaxKeiser.com re the recent Business Insider article giving 11 reasons why gold is in a bubble. Read the article and watch the video retort from one of Max's readers. I have to agree with retort of the bubble premise, particularly this point:

"Almost every industrial use of gold is also an industrial use of silver. Since silver is much cheaper than gold you can imagine that people would rather use silver than gold for industrial purposes. Its no surprise that silver has outperformed gold this past year despite all the media fuss about gold."

This point is the strangest of the whole 11, if you were making a product that required gold for some reason, eg in electrical contacts, but you could just as well use silver why wouldn't have already switched to silver - or more sensibly used silver from the start? More importantly many silver's industrial uses can only be performed by silver and no other metal.

Ultimately Gold derives it's value because it is rare and the above ground supply increases on average at 2% per year, which is roughly the same as the world's average population growth. That means Gold's supply to population is static unlike paper currencies which seem of late to have grown exponentially.

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