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American Century Investments recently made some excellent comments on the gold rally.  They maintain that gold is not in a bubble and remains a rational bull market.  Their reasoning is based on several factors including solid fundamentals, increasing central bank demand, declining confidence in governments and the belief that fiat money is failing us.  In order for the rally to continue they see three primary factors playing vital roles:

“1. Low or negative “real” interest rates globally (stated interest rates minus the rate of inflation—negative real rates have typically been associated with inflation in the past).

2. Fiscal concerns highlighted by massive debt and ongoing budget deficits in the developed world. These concerns are exacerbated by partisan politics in Washington, and political and social unrest in debt-ridden European countries.

3.  Emerging market economic development continues apace, meaning more commodity-intensive growth and inflationary pressure in the global economic system, as well as a growing consumer base eager for gold as status symbol and savings vehicle.”

I largely agree here.  Remember, we don’t have to agree with the gold bull market to be believers in it.  We have to view this market through the eyes of its participants.  This is the Keynesian beauty contest.  If you are in a contest in which you are required to guess which beauty pageant contestant will receive the most votes then it’s useless to vote based on who you think is the most beautiful.  Instead, you vote for the contestant who you believe the other participants will vote for.  With this in mind we have to recognize that most market participants see gold as protection against fiat money, inflation, hyperinflation, dollar debasement, debt monetization, etc.  This fear trade is the primary piece of the gold puzzle.  We don’t have to agree with it, but gold is likely to continue its bull market as long as these fears persist.  I see no reason to believe the bull market is over.

Source: American Century Investments

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