oct 2010 wrap: gold bubble and google searches

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  • 8/8/2019 Oct 2010 Wrap: Gold Bubble and Google Searches

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    equities, housing, and other commodities are still far below

    their record highs. Therefore, they say, gold is acting abnor-mally, and as such it must be in a bubble. But here they arewrong, for there are actually many markets hitting recordhighs. Housing markets in Canada, Australia, Norway, Finland,Sweden, China, Singapore, Taiwan, Hong Kong and a numberof other countries have broken or are nearing record highs. Anumber of emerging equity markets including Sri Lanka, Phil-ippines, India, Indonesia, Argentina, and Mexico have recentlybroken to record highs, and Brazil, Korea, Israel, and Malaysiaare a hairs breadth from their records. Several base commodi-ties are at or near record highs, including cotton. The CRBTextiles Index, which includes not only cotton, but also bur-

    lap, print cloth, and wool just broke its last peak dating back to1995. Coffee hit 15 year highs in early September. Last weekrubber prices hit new records. Other more esoteric indexes wetrack including the Live-Ex Wine Index and the impressionistand modern components of Mei Moses Art Index are also atrecord highs. Lastly, in Canada (and probably the rest of theworld) consumer prices for fruit, vegetables, transportation,and tobacco continue to hit new highs. So is gold an odd duck?Not at all. Rather, money seems to be continuing its long andrather lonely decline.

    Of course, a bubble theorist will tell you that the issue is morecomplex than record high prices. So what is a bubble? Usually

    an assets price is well-anchored to underlying economic realityby a sound set of foundations. The bubble process begins whenpeople substitute a previously sound set of foundations with anew set of foundations. These new foundations are optimisticin nature, forward looking, and imaginative. A bubble cantemerge if only one person adopts these new foundations. Itrequires ever larger numbers of believers to continue expand-ing. Price increases confirm believers optimistic expectations,resulting in a reflexive process in which higher prices attractmore believers which cause higher prices.

    Were not going to debate whether todays gold price is di-

    vorced from the underlying fundamentals. Instead lets debatethe second aspect of a would-be bubble the idea that everlarger numbers of believers are needed to drive a bubblehigher. If it is the case that gold is in a bubble, it should be afact that the gold meme is occupying the thoughts of a growingproportion of the worlds citizens.

    It just so happens that we have a tool by which to measure whatis on peoples minds. Google Insight for Search tracks how manysearches have been done for a particular term relative to thetotal number of searches done on Google over time. Google

    A rising gold price, or a falling price of cash? And what Google Search data says about peoples attitudes to gold

    Is gold in a bubble? The yellow metal is hitting new record highs.

    Prices are up some $350 since last year. Granted, the value of themetal is moving up fast. But we at the PollittBuro think that itstoo easy to call bubble! on an asset just because it happens to beleaping to new highs. For centuries as long as monarchs andcentral bankers have monopolized the supply of money, anddone a consistently poor job of managing it the prices of things(commodities, assets, goods) have been periodically hitting newhighs. Put differently, the price of money, whether it be in theform of coin, paper, or electronic bits, has been regularly hittingnew lows. After all, the mirror image of any items price is reallyjust the price of money.

    With gold hitting $1350, most have described this event as arecord high price in gold. We only point out that it may also beseen asyet another decline in the value of money to record lows. Itstough to determine whether it is the qualities of gold that aredriving its price higher, or if its the properties of money and thedesire to offload it that are driving moneys price lower, or somecombination of the two. Each asset gold and money has itsown set of underlying fundamentals. So if we are in some sort ofbubble is it actually a gold bubble, or a reverse-bubble inmoney?

    Remember that money whether it be dollars or pounds, coinsor paper has been in a bear market for centuries. That it has

    fallen to yet another low relative to gold is just a reversion to thelong-term trend. The error of those who describe $1350 gold asa bubble is that bubbles by definition are unsustainable odditiesthat are destined to dramatically reverse themselves. But goldnear record highs, and money at record lows, is a historical regu-larity, not an abnormality and, as such, the current market isprobably on firmer ground than the bubble theorists might haveit.

    Bubble theorists like to point to the fact that the only asset hittingnew highs nowadays is gold, and that almost everything else

    The Growing Bubble in Gold Bubble Theories

    Pollitt & Co. Inc.11 King Street West, Suite 1950, Toronto, ON. Tel: 416.365.3313

    625 Boulevard Ren Lvesque Ouest, Bureau 930, Montral, QC. Tel: 514.395.8910

    Now thats a goldbubble!: Ascending

    Chilkoot Pass, YukonGold Rush. 1896.

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    makes this information available to the public. Having played a bitwith this tool, we show our findings below. The first chart tracksthe number of searches for what we assume to be the most single-minded search terms employed by would-be gold drones caughtup in a bubble: Buy gold and gold price. We have averagedout the data from these two searches into one data series, on topof which we overlay the gold price.

    In general, a rising gold price is correlated with growing searchesfor buy gold and gold price. Peaks in gold prices coincide withpeaks in interest in buying gold. We assume that there is an inter-action between these two higher prices drive interest in buying,and interest in buying drives higher prices.

    What is apparent is that the recent jump to record highs has notbeen accompanied by the sort of search data that one might haveexpected given previous reactions. The early 2008 peak, the Oc-tober 2008 Lehman collapse, and the late 2009 jump attractedmuch more curiosity than the present jump, with search activityexpanding in line with price. Which leads us to believe that the

    current 3 month-old bull market from $1150 or so to $1350ishhas not been driven by a wave of buying by gullible dentists,grandmothers, and taxi drivers, but a rally led by insiders. If bub-bles are generated by hoards of novice buyers, then this isnt a

    (Continued from page 1)

    The information contained in this report is believed to be reliable, but its accuracy and/or completeness is not guaranteed. All opinions, estimates and other information included in this report constitute our

    judgement as of the date thereof and are subject to change without notice. Pollitt & Co. Inc. does not issue ratings or price targets on any securities mentioned within this letter, nor does Pollitt & Co. Inc.

    maintain and publish current financial estimates and recommendations on securities mentioned in this publication. Pollitt & Co. Inc. discontinues coverage of the stocks highlighted in this letter. For informa-

    tion on our policies on research dissemination, please see our website, www.pollitt.com.

    Stock Rating Terminology:Buy: The stock is expected to outperform its peer group over the next 12 months. Hold: The stock is expected to perform in line with its peer group over the next 12 months. Sell:

    The stock is expected to underperform its peer group over the next 12 months. Our stock ratings may be followed by (S) which denotes that the investment is speculative and has a higher degree of risk

    associated with it. The company may be subject to factors that involve high uncertainty and these may include but are not limited to: balance sheet leverage, earnings variability, management track record,

    accounting issues, and certain assumptions used in our forecasts.

    bubble. Not yet.

    The idea that gold is in a bubble has been spreading fast. LastDecember Nouriel Roubini penned an article entitled The GoldBubble and the Gold Bugs.Later, in January, George Soroswould say that: the ultimate asset bubble is gold. The goldbubble idea has since become daily fare in the financial pressand blogs. Our second chart plots the gold price against thesearch term gold bubble. As one can see from the movement

    of this curve, it was in early 2008 when the metal broke itsold 1980-era peak that the idea of a gold bubble started tocome into vogue. Google searches for gold bubble idled untilthe fall of 2009, only to explode as prices surpassed the $1000mark. The idea of a gold bubble has since gained wider cur-rency on the metals rise to $1350. Which leads us to won-der where is the bubble? In the price of gold, or amongst thegold bubble theorists?

    Our analysis doesnt mean that gold is going to continue rising,nor that it is set to retreat. All it means is that golds rise mightbe better viewed as a continuation of moneys steady decline invalue. As such, price strength is not as abnormal as most com-

    mentators are making it out to be it is a reversion to trend.Furthermore, according to our reading of Googles search data,the buy gold meme has not reached the contagious propor-tions that might qualify it as a bubble. Probably best to onlybegin worrying about an actual bubble when searches have at

    John Paul [email protected]

    Toronto, OntarioOctober 19, 2010