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Commentary Topic from greenfaucet

Everyone Knows Gold is in a Bubble

The common knowledge is that once the Fed begins to raise rates the dollar will rise and the commodity rally will stall. In fact, the predictions are that there will be a massive rally in the greenback and gold will get crushed as nervous investors scamper through the narrow exit.

But when looking at history, the US dollar has not rallied at the inception of a change in monetary policy. Once the Fed begins to tighten the dollar continues to fall for about a year. Let's look at what occurred during the last such tightening cycle when the Fed began to raise rates in July of 2004. The dollar fell another 10% on the Index. And according to Bloomberg, didn't breach the level where it was when rates began to increase and remain there for at least one month until November of 2005.

The truth is that the dollar will not rise until the real interest rate provided from owning the currency surpasses those of its competitors. It will also not rise against gold until interest rates rise to the point that the inflation rate of the currency is less than the inflation rate of mine supply.

It seems that everyone is worried about the price of gold and is calling it a bubble. However, the nature of bubbles is that nearly everybody must agree that there is no bubble for one to actually be in place. Also, gold is still one of the most under owned asset classes in investor's portfolios and compared to government debt, it is  truly scarce.