The year 2011 ended on a very weak note for the price of gold, which tested support near the lowest levels since August as the precious metal slid below $1,550. This movement even drove the GoldMoney Fear Index below 3% as US M3 continued to rise, surpassing $14.4 Trillion. The downward path of gold since the September highs immediately prompted cries that the "bubble was bursting" from every corner of the financial press.
They could not be more wrong.
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It is not enough for prices to go up, they must go up beyond what is justified by value. There must also be a psychological "herd" effect. If only a small minority takes part, it is difficult for a self-reinforcing feedback loop to happen. We've already explained how participation in the gold market remains the province of a tiny minority, even including all the "paper gold" instruments.
The importance of the GoldMoney Fear Index lies in answering the first question: What is the value of gold? As we've said before gold must be compared to its peers- other forms of money- in this case the US Dollar.
The chart's message is powerful, the amount of dollars in circulation is still huge compared to the amount of gold that used to, barely 40 years ago, back them and give them the credibility necessary to become the world's reserve currency.
A gold bubble would see, at the very least, fear index levels approaching those of the 1980s. It would see financial headlines cheerleading, rather than disparaging gold. It would see as many people buying gold coins as were buying Nasdaq stocks in 1999 or US houses in 2006. It might even see "gold coin" rank higher on Google Trends than "real estate".
There might come a time when gold is once again overvalued and it makes sense to sell it, (or to spend it), but right now we are a world away from anything approaching a mania phase. The gold price has not even made new inflation-adjusted highs! Meanwhile the fundamentals, monetary policy and interest rates, remain extremely positive and show no signs of changing in the near future.
This last factor is by far the most important. As long as the world's central banks think that they can go on "making money" and printing at will, the market will look for alternatives that cannot be debased, devalued or counterfeited.
Gold cannot default. If history is any indication, we are approaching an era when protection from broken promises will be worth its weight in gold. In the year of the dragon, hold onto your hoard.
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