Gold prices hit record. Is gold still a buy?

The price of gold jumped above $1,800 today. We can imagine $2,000 by the end of the year.

Meanwhile, Wells Fargo, among others, is warning of a ‘bubble’ in gold.

Is there a bubble in the gold market? An AP report explains why people are buying gold:

In October 2007, it sold for about $740 an ounce. A little over a year later, it rose above $1,000 for the first time. This past March, it began rocketing up. On Wednesday, it traded above $1,793 an ounce, just shy of last week’s record of $1,801.

Meanwhile, stocks, despite rising sharply in the last two and a half years, are only slightly higher in price than they were a decade ago. Since hitting a record high in October 2007, the Standard & Poor’s 500 index is down 23 percent.

Gold hits a sweet spot among the elements: It’s rare, but not too rare. It’s chemically stable; all the gold ever mined is still around. And it can be divided into small amounts without losing its properties.

Ultimately, though, gold is valuable because we all agree it is. It was used around the world as a currency for thousands of years, and then it gave value to paper currencies for a couple of hundred more.

Now, in a time of turmoil, from the credit downgrade and debate over raising the debt limit in the US to the growing financial crisis in Europe to worries of slow growth across the globe, gold is dazzling investors.

But wait….there’s more to the AP story:

Sharlett Wilkinson Buckner, of Humble, Texas, recently took an old bracelet, ring and necklace to her local jeweler and walked out with $1,070.

“I couldn’t wait for my husband to come home,” she said. “I fanned my money in front of him and said, ‘Look what I got for my gold.’“

The next day, he sold an old gold necklace for $650.

Do you see what we see? The average person is still ‘out to lunch.’ He has no idea what is happening. Desperate for cash, he sells gold in order to load up on – paper!

Of course, it may turn out to be a good move. At least, in the near term. The whole world is drowning in a tub of debt. As debt drains away – we are in a Great Correction, remember, a period of debt-reduction – ‘money’ goes down the drain too.

In an expansion, the banking system turns on the taps. It magnifies purchasing power…by making loans. In a contraction, purchasing power goes down…as loans are repaid or written off. A $100,000 loan that is repaid reduces the ‘money’ supply by $100,000 (unless it is lent out to someone else). In a fractional reserve banking system, a loan that can’t be repaid…reduces the money supply by as much as $1 million. It wipes out the bank’s lending capital, forcing it to reduce its loans outstanding.

This de-leveraging process should help support the value of the dollar and reduce the demand for gold as a refuge. But so far, gold is still going up. And in the long run…after the feds have intervened…it should soar.

Here’s our old friend Doug Casey on the subject:

I hate encouraging people to buy gold at $1,800 an ounce, because that level is already more than 700% above the bottom in 2001, and I’m a bottom fisher. I like bargains, and I can’t call gold a bargain today. But it’s plain as day that gold is going to go higher. There’s simply no other place for people to try to safeguard their wealth as the dollar, euro, and other currencies plummet toward their intrinsic values. What else could people buy as they get more and more afraid of paper currencies losing acceptance? What are corporations going to do with the billions of dollars in their treasuries when their management gets frightened? Where else can they go when they need to get rid of dollars, euro, yen, and yuan? Central banks, too – what will they do when they need to dump dollars in favor of something that will hold value?

This is why I see a bubble in gold still ahead. It has nothing to do with the supply and demand for gold in the jewelry trade, or whatever – it’s going to be a result of there being no viable alternatives when the paper-money con game is over. Gold is the ultimate cash, and that’s where people will go when there’s a global, total, panic to cash.

Gold is fundamentally a bet that the financial authorities are losers…that the world’s paper-based monetary system is headed for destruction, and they can’t stop it. It is a good bet.