A bubble is when prices gets distorted from fundamentals by speculation, fear, market manipulation. They are different from cycles which are the natural trade-off and re-adjustment of supply and demand; the difference is that bubbles pop [1] . The problem with understanding gold is that it's hard to work out the fundamentals, which explains why there are so many myths about it.
Myth#1: The price of gold correlates with CPI in USA:
That gold long-term is a hedge against inflation is undisputed; legend has it that a toga in Ancient Rome cost about the same in gold as a suit today. But I just saw a special offer at a Savile Row tailor for suits that were priced at £2,000 last year, going for £500. So if the "toga" theory is correct, gold should now be worth a quarter of what it was worth last year, like $250? And that's not counting the fall of the pound/dollar exchange rate.
But then any self-respecting economist can explain how it is, that although now the price of just about everything is going through the floor, that is not "Deflation" that is "Disinflation", and they will tell you, anyway. that's not "core". One question, if we take (a) food, (b) gasoline, (c) housing, (d) automobiles, (e) clothing, and (f) computers out of the CPI calculation (the cost of all of those are going down)...is there anything left?
Here is a chart of the price of gold (annual average) against the US CPI Deflator:
That is not a good correlation; what it proves is that based on current published CPI numbers there is a 95% chance that the price of gold should be somewhere between $300 and $1,200 (and a 5% chance it will be outside that range).
That's not very helpful; sure long term perhaps, but there is something wrong with that comparison, although it probably proves that the new idea that's floating around in some quarters that gold protects against inflation AND deflation, (the universal protector against all things bad), is unlikely.
All it really proves is that either over the past thirty-five years or so gold was massively mispriced from time to time (some people say there was a conspiracy), or there was something massively wrong with the CPI numbers (more on that later).
Myth#2: Long Term Gold has been a…
