Gold is a bubble?

[babbleon]

I posted recently asking what the next bubble might be. Got some good responses here and then had a conversation with an economy professor at my alma mater.

He said gold was currently ‘bubble-like’ and to stay away from it. He said the current run-up we’ve seen since ’01 is unsustainable.

I’m confused. I thought after doing plenty of research on the subject that there was potential growth in gold but now I’m not so sure.
Thoughts?

[drunkle]

pure uneducated speculation:

gold is bubbled, but with more to go, particularly with the recent fed cut, euro banks poised to cut, more cuts looming, a skittish economy, china on a precipice and ww3 looming.

[CricketOnTheHearth]

I’m not sure what to think of gold.
For one, I’m getting deja vu to the big gold boom of the early ’80’s. Then, like now, the economy was under great stress, and people were scared– so they stampeded to gold. At one point it got up to $1000 an ounce IIRC.

In those days, too, just like today, you had shills pushing gold on the mass media. It seems that whenever it spikes up to a high price, that’s when sleek-talking salesmen and saleswomen come on the TV urging you to buy. Hm, you think they bought it in ’05 at $450 an ounce and are looking to sell….?

However, the peak of the ’80’s didn’t last long, and the price quickly dropped back down. I saw a graph on one of the econ blogs recently which showed the big ’80 spike and the rise we’ve had in the last couple of years. Compared to the prices of gold the rest of the time ($300-400 range for years on end) they both looked like short-term spikes of about equal height.

On the other hand, there is the argument that gold is the item of value of choice when dollars, stocks, etc head south. It is the one item you can be sure that people will always want and buy.

You could also say the rise in the price of gold is an illusion which reflects the fact that the dollar has actually fallen in purchasing power.

I’m inclined to agree with drunkle. Gold seems kind of “bubbled” to me– but passions are high these days, and will drive its price higher in the short term (next year or two), IMO.

>chirp<

[stockstradr]

I bought gold yesterday, 5% of my portfolio.

I see a correction coming, yes. However, I bought because I’m sick of watching myself use the “I expect a correction in gold prices” as an excuse to avoid buying gold.

I cannot hesitate any more. Way back at $450/ounce I did the research and concluded gold was headed for $1,000/ounce in five years. So far it looks like I was right, but I missed making money on my prediction.

So finally I bought and I’m going to just hold that gold, even if we see a correction back to $640/ounce levels. Instability in global markets and flight from the dollar are the primary reason money will move into GOLD.

[stansd]

I’ve been hesitant to go into Gold, but I have about 40% of my portfolio in TIPS (Treasury inflation protected securities), which seem like the next best thing. Most of the rest is in international stocks….Thoughts on TIPS vs. Gold?

[stockstradr]

one more thing.

Today I increased my SHORT position on oil. “DUG” is one way to get 2X inverse exposure to oil.

Go ahead. Laugh. Consider me crazy for shorting oil. However, understand this is not a long-term position. I see oil going below $50/bbl within 24-36 months. Beyond that time frame oil prices are headed up.

Recession is at our doorstep. Worldwide oil demand is already falling. Every damn hedge fund and foolish investor has loaded portfolios heavy with energy. I’m a Contrarian.

It is time to short oil.

When the recession takes oil prices below $50/bbl, then it will be time to close those short positions and BUY BUY BUY because of course the long-term trend is UP.

[stockstradr]

TIPS can be seen as a smart move, but I have hesitated, for the following reasons..

Many think the CPI is total bullshit, perverted more and more with each “revision” as part of a conspiracy to under-represent true inflation so our government can inflate its way out of national debt. Foreigners holding our debt must be tricked into thinking our inflation is lower than actual.

Additionally, the dollar continues its long painful decline on international currency markets.

Here is an example. You hold TIPS for five years. China decides to unlink from the dollar and let the RMB roam free. So let’s say the RMB-$$ exchange rate moves 50% against you. Many respected economists do think the RMB is 50% away from its true unrestrained floating market rate. On a fixed rate control, the commies already allowed it to move 10% in that direction in last 4 years.

Now you cash out your TIPS. Think about what will have happened over that five years to the price of every Chinese made product (pretty much 90% of what’s in our retail stores)? Effectively the value (to buy foreign made goods) of those TIPS funds will have fallen dramatically.

I have friends (Chinese) who are moving money into China, and buying CD’s from Chinese banks. The interest rate kinda sucks, but the long-term exchange rate trend is going to prove out their wisdom.

Over the last five years we have moved over half our assets into China. We own property in China not in America. We have savings accounts in the BoC. I don’t think you want your money in dollar-denominated assets.

You are investing in our government at a time when foreign nations are realizing the US is no longer a credit risk worth investing in! America is a junk bond credit risk.

[Stu949]

I agree about TIPS – government inflation data is crap, so your TIPS are modest, at best, for inflation protection.

Is gold already in a bubble? I don’t think so, but I agree that its flucuations are not for everyone. I bought $5,000 worth of bullion at $425 an ounce back in 2004 – haven’t touched it since; except for on occasionl mining stock here or there. Yeah, you here some gold ads on the radio, but I don’t think gold is in a bubble until it is a topic at cocktail parties – I don’t see the mainstream kinfe catchers jumping on gold right now. I think calling a gold top right now is like calling a real estate top in 2003/2004 (depending on the area). You would’ve missed the two best years.

Been thinking about jumping on a couple of silver/gold miners if the overall stockmarket pulls back a little in the next few weeks. Maybe jump in on some miners prior to Ben’s next rate cut. Play it short term.

Stocks will probably head lower from here on out; however, the public will see sporadic gains and think the market is remaing healthy. Long term, I think you’ll see a gradual decline in equities.

I’m looking into a mixed currency index for inflation protection as well. Silver/gold; other currencies (euro, yen, and other Scandinavian currencies); and pure commodities plays (sugar, coffe, cotton) if you can get into it – tough for the average investor though.

[stockstradr]

I ask myself this straightforward question:

“Do I think over the last five years, the average actual price inflation has been 3% on the basket of items my family typically buys?”

That’s what our government claims, based on CPI.

What a joke!!!!

http://www.bls.gov/cpi/

(At that web site click on “Inflation Calculator” link)

[Anonymous]

I think Gold is headed higher in the next two years, and just bought in myself today (10% of assets), as hedge vs inflation. It’s ‘high’ vs a few years ago, but nowhere near inflation adjusted peaks in the 80s

[desmond]

I have never heard anybody actually making money on Gold, that is, actually selling it for a profit. Most buy and hold, hold so long they Will it away. If selling for a profit starts to happen how fast would the price fall? I can see myself buying it, the prices then plunge, and I fall in love with the shine not the luster.

[asragov]

You might like to read Minyanville’s article on the past, present, and future of gold.

It is excellent:

http://www.minyanville.com/articles/gold-gld-nem-asa-gss-dollar-fed-greenspan-housing-mrb-uxg/index/a/14027

[stockstradr]

You might like to read Minyanville’s article on the past, present, and future of gold.

You are right. That is a brilliant article, and one I think is worthy of deep reflection, in terms of repositioning one’s portfolio.

Thanks for posting that link!

[drunkle]

the author assumes that global economies will remain sound through the us downturn. is this a realistic assumption? europe is facing a liquidity crisis and housing boom of their own. china is facing stiff inflation due to pegging the yuan to the dollar. canada and australia… with strong regional currencies, are they to become service oriented economies like the us?

if you invest in gold, but dont get out in time for the inevitable (and historically rapid) reversal of liquidity, how will your investment fare?

for savvy investors, gold may be a good bet, but for joe 401k… seems to me the gold rush is as risky as ever. sure, it’s going up for now. sure, it’s better than blackjack. but when to cut and run? like all the re investors who knew a sure thing when they saw it…

[Eugene]

My thoughts.

On gold: yes, gold has the tendency to get bubbly. But it’s nowhere near as expensive as it might be.

http://www.itulip.com/images/goldReal.jpg

And even 1980 peak is not the limit. We have almost a billion of people living in the Western world, and all these people are conditioned to believe that their dollars and euros and pounds maintain their value well. Imagine what happens if things start going haywire, America hyperinflates, Europe follows by lowering rates, and all these people lose their trust in fiat currencies. Also, imagine what happens if some country ends up going back to gold standard. There’s surprisingly little gold in the world. Total value of all gold ever mined is somewhere around $3 trillion at current prices. For comparison, total liquid net worth of all Americans is $30 trillion.

On TIPS: they are not as bad as people think. Government has been trying to keep some price increases from showing up in CPI, but it’s been mostly successful in delaying the effects. For example, they hid the housing bubble from CPI by using rent figures and excluding house prices. Guess what, now we’re looking at accelerated increases in rents nationwide as house prices are going down and former “homeowners” end up back in the rental market.

Overall, TIPS and gold are on two opposite ends of risk/reward specturm. TIPS are low risk (guaranteed not to lose any money) but low reward. Foreign currencies are in the middle. Gold is high risk (what if it falls back to $200?) but very high profit potential if you time the bubble and sell at the peak.

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