"If the gold price was to become a bubble what would cause the price to pop."
Eoin Treacy's view Thank
you for this interesting question. What might initiate gold fever has been widely
discussed in various quarters, not least in this forum and answers range from
runaway inflation to the monetary response to crippling deflation. However,
the potential catalyst for an eventual peak in gold prices comes down to two
possible scenarios as I see it.
Rising interest rates have choked off more bull markets than just about any other factor. Gold is a non-income producing investment so investors depend on capital appreciation in relative and absolute terms to justify an overweight position. At some point, government bond yields could rise to a level that is competitive with gold's price appreciation and could sap investment interest in the yellow metal.
A massive increase in supply occurs at the top of just about every major bull market. Rising prices result in new capital being made available for previously unviable projects, new technology is developed to increase supply and substitution becomes an increasingly urgent requirement. Who knows, at a major bubbly peak for gold maybe someone will figure out to how economically extract gold from sea water? What we can be sure of is that supply always increases at the top of the market, if for no other reason than because those who were buying have turned into sellers with inventory to liquidate.
Right now, there is no evidence that gold is hitting a long-term peak. The Dow/Gold ratio has contracted significantly but is not yet at a level consistent with previous bull market peaks for gold. However, gold has advanced for 11 consecutive weeks and is becoming increasingly overextended relative to the 200-day MA. The short-term uptrend remains consistent and a clear downward dynamic, such as that posted in December 2009, would be required to signal the onset of a mean reversion correction.