Are precious metal prices in a bubble? Yesterday gold hit a record high of $1,530 an ounce and silver is approaching $50. In 2000, these two precious metals sold for around $250 and $4 an ounce respectively.
The bubble question is a fair one. Whenever you have sharply rising investment returns that seem to be going wildly higher all the time and forever, look out. The financial world doesn't work that way. People who rested in this fantasy when the Dow first hit 14,000 soon learned that lesson.
In 1980, when silver hit $50 and gold was at $850, people likely thought there was no ceiling in sight. But then the prices fell off. But there was reason to anticipate that reversal. Jimmy Carter's policies had done terrible damage to the U.S. economy, giving us all lots of reasons for malaise in our view of the future. But when Ronald Reagan came to office promising growth-oriented policies, and when he succeeded in getting the largest tax cut in American history through a Democratically controlled Congress, that was a sign that money would soon be moving out of metals and into growth-producing, dollar-strengthening investments. And that's just what happened.
The bearish prices we are seeing today in gold and silver are a response to the weakness of U.S. and global economies. The American dollar is falling like a stone. Because the U.S. dollar is the reserve currency (i.e., the world currency for trading oil, etc.), metals and the dollar move in opposite directions. The value of gold is fairly stable. A significant part of its shifting prices reflect changes in the value of the dollar, not the value of gold itself.
Gold has been climbing steadily since 2001. George W. Bush was quietly devaluing the dollar throughout his presidency for political reasons. But what Bush did in clubs, Barack Obama has done in spades. What Bush did in inches, Obama has done in yards-vastly expanding the federal deficit and the national debt to staggering proportions. He said he did it to save the country, but he did most of it to push the government into areas of our lives it had never been before, and to send money and power to his political supporters. The stimuli have had no effect on economic growth. In fact, the added debt has been a drag on the economy.
When the Republicans retook the House, commissioned by the voters to reign in government spending, had Obama tacked to the center as Bill Clinton did after his 1994 midterm defeat, we would perhaps have a sign that precious metal prices were soon on their way down. But the president has signaled no such change in course. In fact, in his budget-cutting plans, he has signaled his continued determination to raise taxes on the job-producing class.
So where are precious metal prices going? Although there are no guarantees, given that the Federal Reserve indicated on Wednesday that interest rates would stay low for some time to come, the considerable inventory of homes that are headed for foreclosure, and the promise of deadlock in D.C. over deficit reduction, I see nothing on the immediate horizon that might moderate this upward price curve.
Keep in mind that adjusted for inflation (i.e., expressed in 1980 dollars), the record high for gold is around $2,300 an ounce. We have not even reached the dollar-for-dollar $50 record for silver. It is still underpriced relative to gold, though since 2007 the price of silver has been rising much faster. In other words, there is every reason to believe that there is a lot of upside to precious metal prices. That's the good news if you still want to get into the market. The bad news is unemployment, inflation, and a huge, tragic waste of human potential as we flounder in this ideological soup of Obama's wealth redistributionist fantasy.