How to tell when gold is in a bubble.

[audrey_girl]

Re: How to tell when gold is in a bubble.

In my opinion, there can be no quantitative significance to a particular value of the Dow:Gold ratio... especially any comparisons that span different historical periods of gold's exchangability to currency. I do think the basic pattern of such a chart has good qualitative significance, but any reference to the actual numerical value of the ratio for purposes of timing are an exercise in numerology. We should remember WHY paper assets rise and fall relative to gold -- all the causal relationships that EJ has highlighted -- and time our trading into and out of gold based on that. Are we managing our paper currency and public finances responsibly? If the public finances and outlook for the dollar are getting worse, then the fundamental case for gold (to an American, at least) are getting better. Add to that various behavioral observations to fine-tune the market call, and that should be that. I guess this mostly boils down to "wait for iTulip to tell us", but the point is that trends in the Dow:Gold ratio reflect trends in the underlying economics -- they don't dictate those trends.

hi Ash -

yes agreed - the dow:gold ratio reflects underlying fundamental and serious issues with the American economy as it approaches 1 or 2:1

[grapejelly]

Re: How to tell when gold is in a bubble.

when the shoeshine boy says "buy xxx goldmines"

do they still have shoeshine boys? Okay, then when the cover of Time has "The Year of Gold" on it. Will they still have Time magazine? Uhhh...better work on a different sentiment reader:

http://www.google.com/trends?q=buy+g...ate=all&sort=0

[Jay]

Re: How to tell when gold is in a bubble.

This conversation assumes that the transition into fiat currency didn't bring with it unforeseen risks and hidden pressures that might skew those charts, most of which are based on a gold standard era. If things get really bad, due to excessive pressures built up while the reserve currency dollar was shoved down everyone's throat, that ratio could go lower than expected.