Bubble Trouble for Gold?

One of the hotly debated issues this year in the markets is whether or not gold has enduring value or is just an overvalued shiny barbaric metal. I am by no means a gold bug, however I am attracted to gold as an investment, as I have been for several years.

Gold is everywhere. It's in newspaper ads, television ads, even Glenn Beck is begging us to buy gold. We see cash for gold ads and there are now "Gold ATMs" that spit out gold on the go. I even saw a hipster interviewed on the street the other day, touting his investment in gold. "I expect gold to double. At least to double," says adam Gold, a Brooklyn filmmaker, who's at the East Village bar Arlo and Esme. This scares the crap out of me! Whenever you see some clown shouting about the money he makes off of something he knows nothing about, be afraid, very afraid. It's no different than hearing your uncle talk about "the killing he is making on eDigital, amazon, dell, and startup.com stocks."

All good things must come to an end. The difference between the tech bubble and the supposed bubble in gold is many tech companies in the "new economy" had no value, no revenues, no jobs, just a website. But does gold have real value? I would say the most positive thing gold has going for it is that is no one's liability. The US dollar is only as good as the US government. Sure our government can pay our debts, it can just go ask Secretary Timmy for a few more worthless bucks. All fiscal money is suspect in my opinion. When you create something out of thin air and claim it has value, you're on to something.

The Bureau of Engraving and Printing is responsible for printing new cash. Here is their website: http://www.moneyfactory.gov/ The name of their web address is scary enough for me to go buy a few ounces right now! "During fiscal year 2007, the Bureau of Engraving and Printing (BEP) produced approximately 38 million notes a day with a face value of approximately $750 million." That's straight from the horse's mouth. http://www.ustreas.gov/education/faq/currency/pro…

Getting back to gold's underlying value. It's a store of wealth. It's indestructible unlike a dollar bill. Try defacing a gold bar by scribbling on it with ink, it's tough. It's both portable, and easy to store, critical in times of uncertainty. It carries recognized value worldwide outside of our country. Sure China may not except our Federal Reserve Notes one day, but they'll never turn down a few gold bars. Also, due to the fact that people buy physical gold and hold it in their basement or some vault, the government doesn't know about it. Therefore, many use it as tax-free inheritance planning and hiding vast wealth. More, importantly though, it provides a hedge against destruction of paper money. Countries and their currencies have gone boom and bust many times over, but gold has a track record. There is a limited amount of gold in the world, it can never been created out of thin air on command from some spineless politicians who demand more spending.

Another nice thing about gold is the current low interest rate environment. You aren't getting penalized to own gold since it has no dividend or interest payment like other assets. Many central banks are now net buyers of gold in an effort to hedge their currency risks. China seems to have an insatiable appetite for gold, telling it's citizens to accumulate it. You don't hear any of that talk here in the states!

Richard Russell, who publishes the Dow Theory Letters, argues that gold has yet to hit it's parabolic third phase. That is, if you are looking at a chart, when gold bottoms out and begins to gain value that is phase 1. No one notices this stage. Phase 2 is the long bull market, but it is quiet still and many do not even know about it. Most people in our country have never even seen a gold coin before. Phase 3 is when it goes vertical on the chart and is up $100 or $200 in one day. When everyone goes crazy to buy gold because of some huge disaster. This is when I will be selling when everyone is buying.

Check out this chart of gold compared with other bubbles, it's getting attention, but we haven't seen tulip mania hit quite just yet. http://pragcap.com/gold-silver-versus-historical-…

So how do you guys feel about gold? Is it a legitimate hedge against the destruction of the US dollar, or is it no more than speculation?

 

I'm not necessarily talking about a pure inflation hedge. I just wanted to get a debate going on whether or not people believe in the qualities of gold that I listed or people think it's total BS. Sure, lots of commodities and "hard assets" appreciate with inflation, and silver has had a way better year in terms of returns, I'm just talking about gold as a legitimate investment in a portfolio.

 

I have been thinking about this point for the last couple months and have gotten the same feeling, when theres such a commercial (i.e. TV Commercial) urge to buy gold and even the cleaning lady is talking about it, I get a very bad feeling which reminds me of bubbles past. At the end of the day all it takes is one small catalyst to see the whole thing go POP

 

I've been thinking about this as well and though I'm still a little bullish, as suchislife said, with everyone talking about it I cant help but feel that going long would be like skating on thin ice.

People like Coldplay and voted for the Nazis, you can't trust people Jeremy
 

As long as central banks are jumping over each other to devalue their currencies to try and boost exports, gold is a steal, and silver is an even better steal.

 
FXTrading:
As long as central banks are jumping over each other to devalue their currencies to try and boost exports, gold is a steal, and silver is an even better steal.

I tend to agree to this point. As long as these "currency wars" continue, gold will remain a safe haven. At some point, I believe the US Gov't will inflate away their debt with the printing presses.

 
Best Response

Commodities as an investment class are in theory a good thing. The problem tends to be that most commodities aren't really investments. Its tough to say that gold will become more valuable for fundamental reasons (IE that gold will become more useful and therefore more valuable). Its really a commodity to trade. Commodities in general also have carrying costs. You have to put that ounce of gold somewhere, and its usually in an expensive vault. A ton of coal or aluminum also have to be stored and transported.

Speculate/trade on gold, or keep it in your nest egg as a value store of last resort, but as a long term investment? It seems like a crappy idea. Also keep in mind, as a value of last resort, gold isn't so great either. If we experience hyperinflation, shares and any other hard assets should hyperinflate as well. IE the ratio of the cost of a share of IBM to a loaf of bread should remain about the same. And if we are in some kind of true mad max scenario where financial markets crumble and investments/stocks become meaningless pieces of paper, you better have that gold under your bed, and if you really think those scenarios are possible, I would rather invest in guns, ammo, and some non-perishable food.

I think gold is in a bubble of pretty epic proportions. The problem is, the market can remain wrong, longer than you can stay solvent. I said around $1100 that gold was massively overpriced. I think that was over a year ago now. I would be down significantly now, and still waiting for this bubble to pop.

 

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