From Seeking Alpha:
Gold bears point to simple fact that investors cannot value gold in a similar fashion to stocks and bonds. Gold earn and yields nothing. As Jim Grant has stated, gold holds no quarterly conference call. Unlike other precious metals, gold has limited industrial use.
Gold bulls point to the monetary base as confirmation gold is not in bubble. The chart below the U.S. monetary base, the price of gold and the U.S. consumer price index. As the chart shows, gold prices and the consumer price index have responded to historical growth in growth of the monetary base.
Gold Bubble?
While gold bears point to a bubble in gold prices I believe prices are far from bubble territory. Gold experienced a euphoric bubble in the 1980s when gold exceeded the monetary base. While gold has been in a 10 year bull market, the growth in the monetary base has kept pace.
Given the significant debt growth over the last few decades and the policy responses from world government and central banks the monetary base will likely to grow. Due to high unemployment and a weak recovery world central bankers are focused on weakening its currency to boast exports. I think more quantitative easing and other currency intervention is in our future due to the debt hangover.
Investment Ideas
I believe investors should hold some exposure to gold in physical or ETF form. I own physical gold, SPDR Gold Trust (GLD) and am short GLD puts. Gold remains an underowned and underloved as an asset class. Similar to the first chart outlining the bubble territory in the 1980s, gold as a percentage of assets was three times higher in 1980.
I view gold as a long-term investment as opposed to a trade. The link to gold was severed in 1971, a mere 40 years ago. Before 1971, gold played a major role in the monetary system. As the debt growth chart shows an anchor on money creation is needed.
While I believe that QE3 will be a catalyst for further increases in the price of gold, similar to QE1 and QE2, the thesis on gold is not linked to another QE program. The thesis on gold is simply monetary debasement by world governments and debt growth since 1971.