An article this morning in the Wall Street Journal this morning discussed an interesting topic: bubble targeting by the Fed.  Inflation targeting has long been the modus operandi at global central banks since the high inflationary era in the 70s.  The great global moderation of the 1980s – mid 2000s was an exceptional achievement, but the Great Recession displayed the vulnerability of global economy.  Mr. Boeckh said it best when he wrote that root cause of this crisis was a deeply flawed international monetary system: US over consumes, ships dollars to China and other exporters, and they buy US Treasuries and loan us the money, thus shipping the dollars right back and allowing us to benefit from low interest rates and ample liquidity. 

Now however central banks are doing their post mortem and studying whether instead of inflation maybe they should be targeting employment metrics, or maybe asset prices? Sounds like a horrible idea to me.  This is being reactive to a crisis and not properly addressing the issues.  My view is that bubbles are never so evident and clear enough to prevent them ahead of time (whether housing, tech, energy, etc). Furthermore, though there are definitely speculative bubbles likely to ensue in select Emerging Market share and property markets, the article this morning mentioned Gold.  I hardly think Gold is an adequate candidate for mention in the bubble crowd.

Granted Gold this morning broke through the 1,200 level ( a new cyclical high ).  Is Gold reaching  a Minsky-ish bubble? I dont think so.  Here is the bullish / bearish outlook on Gold as I see it. Tailwinds (bullish): global excess liquidity conditions still in place, positive momentum, and diversified customer base (central banks, retail investors, jewellry demand). Headwinds (bearish): possible Fed intervention (?), and technically overbought.  Some quick facts which are consistent with my view that Gold is not in bubble territory: Gold’s inflation adjusted high is over $2,000, central banks continue to buy it (and when they buy, they buy BIG), and there will likely be continued skepticism over fiat currencies. 

I did a quick analysis, look at the graph below.  This is a “history of bubbles”.  It compares the Gold run in the 70s (blue), the Nikkei suge in the 80s  (amber), the Nasdaq bubble in the 90s (red), and for fun I put in the surging S&P in the roaring 20s (green).  The “Gold Bull Market” is in black.  Hardly.

 
Strategically it makes alot of sense to buy Gold, and tactically it is a hot asset (one of the few that did well in 2008), and it is fully liquid.