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  • danbrady danbrady Feb 12, 2009 10:37 PM Flag

    Dollar and gold are finally dropping!

    Out of curiosity, how do you define a bubble? And in what way are bubbles distinct and different from other things enjoying high prices?

    <to save time & thread crawling, I'll pre-post my own thoughts on bubbles as well>

    My own definition goes something like this: If you're up to your ears in something, absolutely swimming in it, then you've found a bubble. By that criteria, we're just coming out of an "easy credit" bubble, which was linked to a housing bubble, which followed the collapse of a Dot-com bubble. My own neighborhood looks like its suffering from a commercial retail bubble, a cookie-cutter fast food franchise bubble, populated by people who seem to be very distressed as the collapse of many of these bubbles. I might even throw in a "reality TV" bubble, or perhaps a "viagra ad" bubble; two things I eagerly await the demise of.

    In contrast, a lot of people recently declared that we were experiencing a commodities bubble. Now, I never quite noticed that the world was up to its neck in excess oil, silver, copper, coal, or natural gas. Yes these things commanded record high prices, but other reasons can account for high prices other than the mass insanity associated with humans flocking towards a bubble. Our current supply of many of these commodities runs in months, and although demand is down, it is down due to economic slowdown, and not due to people just abandoning commodities by the side of the road because they're everywhere and not worth the bother of trying to sell in a glutted market.

    Its an important distinction, as bubbles collapse and behave in a given fashion, while the other causes of high prices often have different behavior as time goes on.

    Gold, when it comes to my bubble test, is definitely *not* currently in any form of excess. Bullion dealers around the world have reported empty shelves, with month delays being routinely given to prospective customers. A number of mines that produce gold (either as a primary or secondary output) have been shut down, due to a combination of both the recent low retail price you noted, as well as the then extremely high energy price. As a result, the "supply" side of the gold equation has moved towards making gold more scarce, not more plentiful.

    I will say that I've noticed the "talking heads" have over recent years tended to use the term "bubble" very loosely, applying to anything that has enjoyed a price peak. They also, for that matter, tend to speak of inflation as if it were the symptom of higher prices. Then again, what can you expect from pretty faces being paid to sound knowledgeable?

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