Saturday, November 23, 2013

Bubble in Gold?- A Comparison

One of my many endeavors at the moment includes the study of and what defines a bubble. Specifically, in regards to the claim that the rise in gold to $1,900 an ounce constituted a bubble and that that bubble needs to correct significantly. Maybe it is my own bias but the rise on the price gold into the 2011 correction just did not feel like a bubble. Did the price of gold get ahead of itself, in retrospect and versus various figures (like money supply growth) the answer in undoubtedly yes. But getting of itself does not in itself constitute a bubble.

As a comparison and in attempt to show my point, I show you the comparison of the price of gold (here the GLD) versus the NASDAQ circa the March 2000 high, the latter of which was a bubble. The comparisons I show use the March 2000 high on the NASDAQ and the August 2011 on the GLD as my reference points.

The first comparison shows the price rise for each respective asset for over 1,700 trading days prior to each high-water mark.

What stands out to me is not only the price rise of NASDAQ relative to the price of gold but the acceleration and duration of the ascent into the ultimate high. Gold, although gaining significantly over a seven year period, just did not experience the same degree of acceleration as seen in the NASDAQ.

You may saying that bubble hard to detect except only in hindsight, and to a certain degree that may be true. With that in mind, I show you another comparison between gold and NASDAQ. The below comparison shows the degree of the price decline in each respective asset class relative to the high for a period of over 580 trading days.

And again, the NASDAQ not only showed a larger price decline magnitude, but also a price decline that accelerated faster over a similar time frame.

Although the price of gold has corrected has corrected significantly since making its interim high in 2011, what else should we expect after a 12-year bull run. But does this make it a bubble? Not when we compare the magnitude and acceleration of the price rise and decline heading into and following the ultimate high.

No comments:

Post a Comment