Is Gold In a Bull Market?

Monday, August 9, 2010, 8:50 AM

Note:  This article was written on May 28, 2010 and is an example of a Martenson Report available to enrolled members, albeit a relatively short one.  My service to enrolled members can be likened to an information scout who provides thoughtful analysis of current data while always remaining clear about the difference between facts, opinions, and beliefs.

Executive Summary

  • Asking whether gold is in a bubble or a bull/bear market misses the point.
  • Better questions to ask involve fiat money management, government responses, and financial market risk.
  • Gold is not in a bull market; rather, faith in our decision-makers is in a bear market.
  • Trust is hard to come by these days. 
  • As for whether or not to buy gold, there are a number of factors to consider.

I'd like to clarify my views on gold, because I approach this topic from a unique perspective that I think has value.

For most, the idea of investing, or even speculating, is a matter of placing one's money somewhere with the anticipation of getting more money back out at a later date.  Naturally, the footnote to this expectation reads, "...assuming money is worth the same."  In this idea of investing, 'more money' is assumed to be synonymous with 'greater purchasing power,' because devalued money may represent a significant loss.  The shifting target in this story since 1971 has been the untethered value of the currency itself.

For many investors, it has been a useful frame of reference to define various asset classes and markets in terms of being either "bull" or "bear" markets, where prices for investments have risen or fallen over some period of time, respectively.

Sometimes, when a bull market ramps out of control and then crashes, it is said to have been in a "bubble."

Recently, the WSJ asked the question of whether or not gold is in a bubble, which is an important distinction for many investors, because if the answer is "yes," then the next question is, "So when will it crash?"

Is Gold the Next Bubble?

It's been the amazing, runaway boom of the past decade. If you'd put your money into gold at the lows about 10 years ago, you'd have made a nearly 400% return. That's left pretty much everything else—stocks, China, let alone housing—in the dust.

But with gold now trading near record highs, the big $1,200-an-ounce question is obvious.

Is the gold rush over?

A four-hundred-percent return in a decade sounds like a lot, and it is, but does that necessarily cross the line into bubble territory?  Given these returns, should we consider getting out?  And if so, what should we get into instead?

To make the case that gold is in a bubble, the illustrators at the WSJ came up with this chart comparing gold to two other recent bubbles, one in Nasdaq stocks and the other in homebuilder stocks:

The conclusion from that chart is that if gold is in a traditional bubble, then it's probably got more room to run, and it may even triple from here before it tops and crashes.  To reinforce the idea that gold is in a bubble, the WSJ goes on to make the point that all good bubbles are driven by stories, not earnings, and that gold fits this definition, because it is all story and no earnings.

But you can't value gold by traditional financial measures, as it generates no cash flow.  So there's plenty of potential to value it by other means.  Eyeballs, anyone?

Hmmmmm.  That's an interesting comparison.  Internet stock analysts had to develop the concept of valuing 'eyeballs,' because there were no actual cash flows or earnings...which turned out to be laughable and wrong.  Continuing on, because gold has no cash flows, it, too, must be the same thing as an Internet stock and an equally laughable concept.

There's a severe logical error in there, but the point is taken.

However, I'd like to flip that chart upside down by suggesting this:  It is not that gold is in a bull market, but that there is a bear market in confidence in paper money, faith in governmental responses to crises, and financial markets themselves.

In my view, gold simply represents the inverse of those markets; it is not an investment that can be compared to others.

People who hold the traditional view that there is one large universe of investments often demonstrate severe confusion about gold, as revealed by statements such as, "It doesn't have a yield," or even the quaint rejoinder, "But you can't eat gold."  For people like myself, who view gold as a financial asset that occupies a parallel universe utterly disconnected from the logic that drives traditional stocks, bonds, and even cash, such proclamations have very little swaying power.

Gold performs and behaves for reasons very different from debt or equity-based paper assets, so asking whether gold is in a bubble or a bull/bear market misses the point.

The right questions to ask are:

Fiat Money Management
  • How much money is being created out of thin air to combat stagnant growth and/or crises?  How does this compare to the amount of gold being produced?
  • If cheaper money is the source of wealth, then where did Zimbabwe go wrong?
Government Responses
  • What is the chance that governments of every stripe will voluntarily select austerity over printing as the response to fiscal and financial crises?
  • Are we confident that politicians understand the true nature of the predicament and will choose wisely?
  • How many politicians truly understand fundamental economic principles?
Financial Market Risk
  • How secure are we in knowing where all the financial risks lie in the financial markets?
  • Do derivatives really cause risk to disappear, or are they more like the chemical dispersants being used in the gulf that keep the oil just out of sight but in a more harmful long-term state?

Does this mean "buy gold?"

This does not mean that I am a strong advocate of buying gold at $1200.  The contrarian in me is uncomfortable at this level.  But at the same time, I cannot think of a single other monetary asset besides gold that is not simultaneously somebody else's liability.  This elevates gold to a special place in my portfolio.

Further, the 'option value' embedded within the possibility that gold may someday be remonetized when various fiat currencies fail is a compelling source of value to me.  Like any option, it may well expire worthless, but it's still in play and has enormous upside should it come to pass.

Currently, all of the trends that I follow, in terms of government responses and central bank actions, have convinced me that we are accelerating down a bobsled track ending in very painful loss of collective faith.  So even as I am uncomfortable buying gold at this point, on many levels, if one has surplus monetary wealth, I do not know of a better action one could take to protect it.

Energy and food remain the key things that people will need, far more than they will need a shiny yellow lump of inert metal.  But the stock markets have been a rigged casino for some time, and more and more people are coming to that conclusion.

Legendary Investor Is More Worried Than Ever

May 22, 2010

Seth Klarman is worth listening to, especially when markets go mad.

Mr. Klarman is president of the Baupost Group, an investment firm in Boston that manages $22 billion. His three private partnerships have returned an annual average of around 19% since inception in 1983—and nearly 17% annually over the past decade, as stocks went nowhere.

To measure Mr. Klarman's importance as an investor, you need only see the value his rivals place upon his words. You could have earned at least a 20% average annual return since 1991—better than twice the performance of the market—merely by buying and holding Mr. Klarman's book, "Margin of Safety": Published that year at a cover price of $25, hard copies now fetch up to $2,400.

But the professorial Mr. Klarman speaks in public about as often as the Himalayan yeti. He made an exception last Tuesday, when I interviewed him in front of a standing-room-only crowd of 1,600 financial analysts at the CFA Institute annual meeting in Boston.

Mr. Klarman specializes in buying securities that nauseate other investors. As the credit crisis exploded, he put more than a third of his assets into high-yield bonds and mortgage-related securities. I asked him what he had meant, in a recent letter to his clients, when he compared the financial markets to a Hostess Twinkie. "There is no nutritional value," he said. "There is nothing natural in the markets. Everything is being manipulated by the government."

If one accepts the fact that markets are rigged in favor of the well-connected and that governments are now manipulating (or influencing) everything, then what sort of assurance can one have that value can be correctly divined or that the rules will not simply be changed to convert one person's gains into somebody else's?

Worse, with risks and losses being hidden and/or simply ignored, it's hard to have confidence that a major financial crash will not simply sweep aside all wealth and gains, no matter how well-protected the portfolio.

Sure, we could invest in energy or food companies (or futures), but we would have to confront the unpleasant prospect that all is not as it seems and that rules will probably be changed in the future.  I fully support the idea that one can be an active trader in these markets, but I am quite skeptical that one can win without putting in a lot of dedicated effort, and am quite certain that placing one's money with an overworked retail broker for placement in stock funds has an extremely unfavorable risk/reward ratio.

In short, trust is hard to come by these days.  I wish that we could dismiss these thoughts as doomerish or cranky thinking, but every one of these concerns has already come to pass.  Rules have been changed, trades have been involuntarily undone after the fact, losses have been simply ignored, trillions have been printed up and spent, lies have been told, and cynicism is displacing optimism and trust.

These are not the sort of actions that support a strong faith in capital markets.


I am not, nor have I ever been, an investor in gold because I think it's in a bull market.  Nor do I worry about it being in a bubble.  Instead, I am a keen observer of monetary policy, fiscal policy, and financial market functioning, and I have a decidedly bearish outlook on each right now.

Gold is not in a bull market; rather, faith in our decision-makers is in a bear market.

Cynicism and gold occupy the same bull market.

There will come a day when I find compelling reasons to exit my gold trade, but it will not come because I glance at a chart one day and decide that gold has 'gone too far,' or because it resembles the chart of

What I am tracking does not chart easily, and that is why the analytical and scouting services I perform have such value.

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spinone's picture
Status: Bronze Member (Offline)
Joined: Jul 12 2008
Posts: 49
Re: Is Gold In a Bull Market?


It is more than a matter of confidence.  We have a fractional reserve currency.  Money is loaned into existance, and the money supply in circulation has to grow.  Now there are not enough lenders with collateral, and banks are not lending.  The economy is largely debt-saturated.  That means our currency, the Federal Reserve Note (FRN), is broken. 

Trade FRN's for gold before everyone catches on.

taxed2death's picture
Status: Member (Offline)
Joined: Jan 24 2010
Posts: 22
Re: Is Gold In a Bull Market?


 I think you are absolutely right about bull/bear market missing the point.I seriously doubt that after thousands of years,humans will just decide that gold no longer holds their interest but an infinite amount of paper does.That would be like someone mowing their yard of orchids then going inside their house to water a pot full of crab grass.Bottom line, you can't print gold.

P.S. Silver shoudn't be overlooked.It is used extensively in industry and much of it not recovered,plus i can swing by the coin shop anytime i have an extra buck or two and pick up a couple ozs.

Pegasus66's picture
Status: Member (Offline)
Joined: Jul 21 2009
Posts: 2
Re: Is Gold In a Bull Market?

Can't remember where I learned this, maybe Glenn Beck, but evidently the Treasury is frightened enough about people buying gold that they came up with an invenstemt "certificate" that mimics gold. It is actually holding the price of gold down. If inflation is factored in for the value of the dollar, gold should really be selling much higher.

I have never thought of gold as a growth investment, as most of the TV ads make you think.  It is a value place-holder, ie. an ounce of gold buys the same amount of material goods today as it did 100 years ago. Gold merely reflects the current value of the dollar . . . which is currently headed south so it takes more dollars to buy an ounce of gold. Having physical gold is a reserve that lets you start over once a crash is past, no matter what the new currency happens to be. It is a tangible item, like land, antiques, artwork, etc. that retains intrinsic value.

skywillow's picture
Status: Member (Offline)
Joined: Jan 11 2010
Posts: 12
Re: Is Gold In a Bull Market?

 Do not expect those who created the problems to solve the problems.

 The US government has no other choice but to de-value the money. 

 Why say "gold is trading at record highs"? Why not say “for the price of gold in dollars to have gone up 400%,

 the dollar has obviously de-valued in a similar percentage.”

 Regarding Energy and Food - my personal investment is in the consciousness that there are remedies.  

For a start, consider how much grain it takes to feed livestock – that grain could feed so many more people than the livestock can feed.

Remedies are in great need,


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