Where is the Bubble — Gold or Credit?

Interesting observation (with caveats):

“In his latest market dispatch, the venerable technician Ian McAvity makes proper hash of the theory being bruited about by the usual suspect sources that gold is a bubble.

At $1,900 an ounce, he observes, gold was 2.2 times its early 1980 peak. U.S. gross domestic product and federal debt, he goes on, are some 5.5 times their early 1980 levels, while the Standard & Poor’s 500 and overall credit-market debt are 11 to 12 times their levels in the early ’80s.

Thus, “the real bubble,” he contends, has been the “issuance of debt that is increasingly stifling any recovery in the Main Street economy.” And there is no sign it won’t continue to do so any time soon.

Little wonder, then, that he’s convinced we’re in the fierce grip of a bear market that could get quite ugly between now and next year’s election day, with the already-battered housing and financial sectors pacing the decline.”

I have no problem with the argument that we’ve had a bubble in credit and an unfortunate reliance on printing and debt.

However, I find the rest of the argument hollow. The S&P in niminal terms may be up 12-fold, but so are earnings. So the value of the index has not risen, only its price.

Gold on the other hand is priced based on what the last guy paid for it (as are equities) — but without any other frame of reference. There are no earnings or yield, so it is strictly a function of last price paid. I don’t see how eventually, that does not end terribly.


Pocketbook Love
Barron’s DECEMBER 10, 2011

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