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Bubbles and Building Blocks
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We are, if you are given to believe the analysts and the pundits, a continent of bubbles.
The tech bubble, the real estate bubble, the credit bubble, and perhaps most ominously, the debt bubble, all clustered together like so many translucent frog eggs, earned their name via their sheer propensity to burst. Their few glittering years of easy gains, inevitably ending in sudden headline-grabbing train wrecks, have led us to believe that every market, every sector, and even every company exists only in bubble form.
Charts trend upwards and we hurriedly begin forecasting doom. Numbers fidget downwards and we pull the ripcords on our parachutes, certain that this is the end, that the bubble is trembling, ready to pop. After all, as Robert Frost wrote, nothing gold can stay—except, as it turns out, gold itself.
Perhaps one of the most damaging effects of the pervasive bubble theory is its seepage into the natural resource sector. As the gold market draws tantalizingly close to the 10-year mark of a steady “bull market,” many of us are looking around nervously, wondering just how long a bubble can stay intact. And indeed, if one views the 10-year chart, there do seem to be some suds at work:
But that’s only if we’re calling the year 2000 a baseline—which seems far too convenient, even for the most casual chart-stalker.
How soon we forget, in our own safe bubbles of analysis, that the more plentiful the data, the greater the accuracy of the conclusion. And so when we follow the charts back across apparently forgotten decades, we see that the baseline upon which we are drawing conclusions of drifting bubbles and rampant bull markets is not a baseline at all, but a correctional trough between cyclical upswings:
Of course, this is obviously not to say that gold’s current pattern falls perfectly in line with earlier historic spikes—and that is precisely the reason why the notions of a soon-to-burst bubble or a dwindling bull market do not and cannot apply. Cycles of corrections and gains persist, but the game has been irrevocably changed, both by industry overhauls (thanks, Bre-X) and a shifting perception of precious metals as foundational investments, rather than the foul-weather safe havens of yore.
Look carefully at the 35-year chart, and it becomes apparent that gold’s current trend has far more in common with the soft cyclical peaks between 1982 and 1998 than with the violent upswing in 1979. There are gains and corrections, rises and falls, steady, deliberate footfalls rather than dead sprints. Yet there is also the consistent presence of a net gain, a pattern that pushes the gold price gradually higher without shoving it into absurdity, underscoring the fact that gold is not about to burst anyone’s bubble.
Thus when we look at the gold market—scrutinizing the charts, watching the spot prices, peering into the future—we must remember that ours is now a sector not of bubbles but of building blocks. We do not spiral off into madness with each ultimately inconsequential headline or data blip like the ill-fated tech and credit bubbles, now reduced to little more than soap scum. We do not search the skies for some hovering Hindenburg, waiting for a nonexistent explosion. We simply build.
Poke the Bear will be on temporary hiatus as Mrs. Patterson and her husband welcome their first child. Regular commentaries will return in April.
Sara Patterson
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Mrs. Patterson began her career as an at-large columnist for The Daily Tar Heel.
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