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Where’s the bubble – gold bullion or the dollar?

June 01, 2011 – The argument that gold bullion prices are in a bubble never seems to go away. So let’s look at some interesting statistics put together by the PFS Group, as reported by Chris Puplava in Uncommon Sense, that correlates the US monetary base to the value of government held gold bullion.

When the last secular gold market began in the 1970s only 17.8% of the monetary base was backed by gold. At first the run on gold bullion merely brought that figure up to a more reasonable 58%, but after a brief decline it rapidly climbed to the 1980 peak where the government’s gold represented some 31% more than the entire monetary base. That’s what a true bubble looks like.

Now consider the relationship today. The price of gold bullion would have to climb to about $1,700 just to reach the point where the last secular bull market began. For the government’s reserve of gold bullion to represent just 25% of the monetary base would require a price of more than $2,380 per ounce, and a sound 50% backing would take double that amount.

In a bubble prices escalate past a cutoff point for demand, such as we experienced in technology companies at the turn of the century and the housing market in 2005-2006, resulting in a supply glut. “Since 1990 the monetary base has grown by 570% thanks to the Federal Reserve, while global gold production has grown by a mere 21%,” Puplava says. The glut in supply clearly is not with gold bullion – it is with the US dollar.

Throughout the final decade of the last century the growth in the monetary supply was gradual relative to gold bullion production, indicative of the relative health of the greenback. But then the Fed began cranking out freshly printed bills and in just two years supply spiked 400% - looking by all definitions like a bubble ready to burst.

The world’s reserve currency being in a bubble is hard to contemplate, but the bubble bursting is almost impossible to imagine. With our monetary base inflated to the current level, however, a burst is inevitable. No soft asset will be able to escape unscathed, and only the strongest currencies will survive.

The rising price of gold is but a reflection of the decay of fiat money, and it will continue to rise until worth is restored to surviving currencies. The ultimate fate of the dollar depends a lot on how extreme the measures are that we allow our government to take, and so far it doesn’t look good.

It is almost impossible to imagine the price of gold leveling out before a minimum of 25% of our money supply is supported. Even at $2,500 per ounce it would be hard to convince me that the long-espoused bubble in gold bullion had actually formed.

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Jonathan Monroe

Senior Staff Writer -

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