I'll know it's a gold bubble when...

I've been hearing a lot about an impending collapse of the current 'speculative gold bubble'.

Interestingly, the seekingalpha.com article mentions, among other things, the growing number of gold buyers as evidence of a speculative gold bubble. Shouldn't there by an equally-large and growing number of sellers?

We aren't yet experiencing a runaway speculative gold bubble. I think the majority of gold buyers are buying and holding gold (or gold equivalents) as an insurance measure, based on reasonable concerns that baseless fiat (paper) money will continue to lose 'value' due to government and central bank meddling.

I'll know that we're in an all-out speculative gold bubble when I start seeing these signs of 'gold mania':

1. All my neighbors remind me how much money they're making in the gold market.**
2. I see late-night infomercials on how to grow wealthy by buying and selling ('flipping') gold.*
3. I hear my office co-workers proclaim loudly “I just made $10K on gold today”, and, of course, they never sell, so it's all unrealized, paper gains.**
4. People are buying McMansions homes at zero percent down payment, because they'll pay the higher mortgage payments using their monthly 'gains' in the gold market.*, **
5. People are buying expensive new cars every year, paying for them by borrowing against their paper gains in the gold 'market' (ETFs, gold stocks, etc.) **
6. I encounter random people in daily conversation telling me if I'm not playing the gold market I'm “losing money”.**

I experienced similar strange behavior during previous 'bubbles':
* Housing bubble
** Stock market bubble

Why is gold rising in value relative to the U.S. Government's official currency? Are we in the midst of a speculative gold bubble? Are we about to experience a collapse in gold prices relative to the dollar?

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Sound money, properly defined, is both a medium of exchange and a store of value.

Gold, though not commonly used as a medium of exchange in much of the world (a situation which may change rather rapidly), is a store of value. It IS sound money.

For the purposes of this discussion, I'll use the term 'FRNs' to refer to U.S. Federal Reserve Notes. Once upon a time, Federal Reserve Notes were redeemable in lawful money on demand. That is what made them a 'note': They were a promise to pay, a representation of something, and not the thing itself. This was understood by most people a long time ago. As long as they were redeemable in lawful money (usually gold, in a known quantity), they represented sound money, which was supposed to be held by the Treasury or Federal Reserve bank, payable on demand. Such is no longer the case. FRNs now bear the simple assertion: 'this note is legal tender for all debts, public and private'.

FRNs, denominated in U.S. dollars, are a legally-mandated medium of exchange (again, this may change rather suddenly if things get worse) but they are definitely not a store of value. Inflation will destroy some or most of the value of your virtual 'dollars' as surely as if you had burned them. They do not represent anything. They are a promise to pay nothing. They are NOT sound money.

There are virtually no real dollars in circulation (the U.S. Treasury doesn't produce many silver or gold coins for general circulation). All we have is a simulation of dollars, virtual dollars, or FRNs, which are a promise to pay... nothing. Their 'value' is based solely on the willingness of others to accept them in payment for services or goods.

What happens when people are no longer willing to accept them, despite federal laws requiring acceptance of these baseless slips of paper?

U.S. dollars (or, more accurately, what passes for them, FRNs or even electronic blips in some computer's memory), and fixed investments denominated in dollars, are failing as a store of value. Their value as a medium of exchange will continue the current downward spiral if this trend does not reverse soon.

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Where can we put our 'dollars' to preserve and grow them with any degree of safety? Bank accounts? No. Stock market? Nope. Treasury bonds? Nope. Treasury bonds are looking rather dodgy lately.

Gold is rising in value relative to 'dollars' (remember, there aren't many real dollars, just virtual ones) because of the continual and utterly predictable slide in the market value of paper money as the quantity of virtual dollars balloons out of control. These virtual dollars are being devalued, as they have been for longer than many people have been alive.

People don't want gold for its own sake, any more than they want dollars for their own sake. People are buying gold and other precious metals to preserve the value of their wealth. Thus, gold and other commodities are increasing in value relative to the virtual dollar.

While there is certainly speculation in gold and other precious metals, I don't see it as a major factor now. The main driver today is the flight to security, and as such, the price increase reflects the ongoing currency devaluation and related risk. Precious metals are being purchased as a form of insurance policy, rather than a speculative investment (excluding industrial use, of course). You don't buy insurance expecting to make money. You buy it in order to prevent major losses. And you pay a premium for that protection.

So, how high can gold go, relative to the dollar? We've had nearly a century of fiat currency and associated monetary inflation, and it's accelerating. The Fed is having a tough time 'stimulating' the U.S. economy to anything near its former activity level. The U.S. Federal government faces (and many state and local governments face) massive unfunded social programs: Social Security, Medicare, and (until a final stake is driven through its heart) ObamaCare. Demographics are working against us; we will have a hard time growing out of this problem. So that leaves devaluation (inflation) or a government default. I expect that our government will do what governments always seem to do when faced with such self-inflicted wounds: inflate their way out of the problem. And that can only destroy what's left of the dollar's value. Ask yourself how high sound money will go relative to unsound, fiat currency.

I expect that there is a huge pent-up demand for sound money, and even today the average American is blissfully unaware of what's been going on. When the average man on the street starts fretting about protecting the value of his (former) paper wealth, I'd expect to see a dramatic increase in demand.

"Paper money eventually returns to its intrinsic value -- zero." Voltaire
Update:
Gonzalo Lira has this to say about hyperinflation in the U.S.:

http://gonzalolira.blogspot.com/2010/08/how-hyperinflation-will-happen.html
http://gonzalolira.blogspot.com/2010/08/hyperinflation-part-ii-what-it-w...

Update1:
All paper currencies are dying …