Doesn’t Gold look like a bubble?

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  • Sun, Mar 08, 2009 - 08:04pm

    #1
    Blackbird

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    Doesn’t Gold look like a bubble?

Hi,

I am new here and just recently finished watching the ‘Crash Course’.  I am Canadian, but recognize that many/most of the issuses mentioned in the ‘Crash Course’ pertain to Canada as much as the US (let alone, world).  

I looked into gold to buy and then looked at a chart showing its history.  It spiked back in about 1980 from around $200 to about $700, then dropped shortly after to $400 range that held steady(ish) through until around 2005 where it climbed rather rapidly up to where it is today.  

With my limmited knowledge of what a bubble looks like it seems to me that Gold is looking like one.  Am I that wrong?

Cheers,

Blackbird

  • Sun, Mar 08, 2009 - 08:18pm

    #2
    Peak Prosperity Admin

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    Re: Doesn’t Gold look like a bubble?

This is what I was afraid of and why I haven’t bought any…

but it’s just a bet

that is, a bet, that the dollar will not crash and etc…

maybe a poor bet

a bet, nonetheless

  • Sun, Mar 08, 2009 - 08:29pm

    #3
    Peak Prosperity Admin

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    Re: Doesn’t Gold look like a bubble?

[quote=caroline_culbert]

 

that is, a bet, that the dollar will not crash and etc…

 

[/quote]

Hi Caroline,

Are you really betting that the dollar will not crash? Pure curiosity, especially since when you look at the stats/number the dollar has steadily been loosing value for over 30 years.

As for the gold question, I would honestly say no, there is not real bubble here, only because of the ratio between debt, and gold as well as the dollar depreciating in value(as well as silver….personally I am a fan of silver).  With that said, I’m holding for a rally in the market before I buy more (gold). I’m finding I agree with Mike Pilat (I’m sorry if I got that wrong) on many of his postings. We are mearly blowing (or attempting) to blow up another bubble here which is gonna be major trouble all tings considered (oil, water, social security/medicare/medicaid, ect…). Having a position in PM will really help, after all, it is the only true, real money.

Mike

  • Sun, Mar 08, 2009 - 08:55pm

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    Peak Prosperity Admin

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    Re: Doesn’t Gold look like a bubble?

Considering the totality of economic activity surrounding the move by gold over the last few years is unprecedented, I think previously trusted models should be questioned. What I mean is this: If the economy had more or less been humming along all systems go for the past four years and gold’s movement had been the same as it has been, then I’d say it would be a more likely candidate for a traditional bubble. But I think the activity in gold is a direct response to the unprecedented nature of other events. Events that I think are unlikely to "normalize" and drag gold back down. I think we’re in the early stages of a permanent economic shift, one that will think very highly of the "value" of gold.

But don’t forget silver. Silver’s a far better bet I think than gold. Most people by no real fault of their own tend to be too gold-centric.

  • Sun, Mar 08, 2009 - 09:02pm

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    Peak Prosperity Admin

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    Re: Doesn’t Gold look like a bubble?

[quote=mainecooncat] .

But don’t forget silver. Silver’s a far better bet I think than gold. Most people by no real fault of their own tend to be too gold-centric.

[/quote]

 

Amen brother….Silver has awesome potential, and is affordable (for now)…. =)

  • Sun, Mar 08, 2009 - 09:05pm

    #6
    Peak Prosperity Admin

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    Re: Doesn’t Gold look like a bubble?

[quote=that1guy][quote=caroline_culbert]

 

that is, a bet, that the dollar will not crash and etc…

 

[/quote]

Hi Caroline,

Are you really betting that the dollar will not crash? Pure curiosity, especially since when you look at the stats/number the dollar has steadily been loosing value for over 30 years.

As for the gold question, I would honestly say no, there is not real bubble here, only because of the ratio between debt, and gold as well as the dollar depreciating in value(as well as silver….personally I am a fan of silver).  With that said, I’m holding for a rally in the market before I buy more (gold). I’m finding I agree with Mike Pilat (I’m sorry if I got that wrong) on many of his postings. We are mearly blowing (or attempting) to blow up another bubble here which is gonna be major trouble all tings considered (oil, water, social security/medicare/medicaid, ect…). Having a position in PM will really help, after all, it is the only true, real money.

Mike

[/quote]

Well my husband’s grandfather had a shi*load of gold/silver hidden under his house and doesn’t seem as if it helped him any… the family cashed in after he died because they had no idea what to do with that much metal.

Seriously… I really don’t know– it’s just a bet b/c, frankly, I don’t really care anymore.  I know that doesn’t sound good but sometimes (more often now) I just don’t care.

 

  • Sun, Mar 08, 2009 - 09:16pm

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    Re: Doesn’t Gold look like a bubble?

I see. Well, People must remember that Gold/Silver, in its physical form more than others, is a defencive investment. It is a way to preserve your wealth over time…..1 ounce of gold 100 years ago would buy you the same amount of goods as 1 ounce of gold now.

I apologize if my question came across wrong, I was just curious.

Mike

  • Sun, Mar 08, 2009 - 09:21pm

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    Re: Doesn’t Gold look like a bubble?

[quote=that1guy]

I see. Well, People must remember that Gold/Silver, in its physical form more than others, is a defencive investment. It is a way to preserve your wealth over time…..1 ounce of gold 100 years ago would buy you the same amount of goods as 1 ounce of gold now.

I apologize if my question came across wrong, I was just curious.

Mike

[/quote]

Oh my gosh!  What are you sorry about!!! Don’t be sorry! … I’m just borderline on the issue and I can’t seem to be swayed either way and it’s just kind of like… ?????  My brain has died for the moment… sorry.  No worries… S’all good. Cool

  • Sun, Mar 08, 2009 - 09:45pm

    #9
    Peak Prosperity Admin

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    Re: Doesn’t Gold look like a bubble?

Bubbles pop when people can no longer afford for the price to go up any more. For example housing; when they couldn’t keep the bubble inflated they lowered the lending requirements so more people could buy homes that they couldn’t really afford by offering low teaser rates and qualifying income requirements by hearsay.

Gold has a built in dampener in that every time it goes up significantly, many people seize the opportunity to sell off some gold in the market or as scrap. The scrap sector is much larger than most people realize as it traditionally represents over 25% of the total annual gold supply – and it was up to over 30% last year. When the price of gold drops enough, people begin to build up their holdings again.

This is why it is called a speculative investment. My wife and I have sold off a some of our gold holdings twice in the past six months – each time we re-enter the market when the price drops again. While you may buy and hold gold; as we do with over 50% of our gold and silver, it is also good to trade some periodically as the market invites you to do so.

We probably hold a higher percentage of precious metals (don’t forget silver!) than many would be comfortable with but to be honest, what else do you feel safer with?

The stock market (Dow) is now valued at 1997 levels – which effectively means that all gains since then have been eliminated. If you invested $10,000 in 1997, you would have around $10,000 today. If you bought after 1997, you most likely have lost money. Ten years ago gold sold for around $290/ounce which means that it has more than tripled in price, a $10,000 purchase of gold ten years ago would be worth over $30,000 today.

Compared to the stock market, in the last 30 days gold has done 8% better, in the last 60 days gold has done 31% better and in the last 6 months gold has done 52% better. And gold has done better in the long term; in the last year gold has done 41% better, in the last 5 years it has done 260% better and in the last 10 years gold has done 350% better.

Larry

  • Sun, Mar 08, 2009 - 09:51pm

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    Re: Doesn’t Gold look like a bubble?

Hello BlackBird:

I can’t think of anything that will make the dollar stronger, other than other currencies tanking and people moving from say the Euro or the Zloty to it. I would think as they do that a percentage will move to PMs.

Having said that, short of Bernanke figureing out how to turn lead into gold like he turns air into dollars I’m pretty convinced the dollar will be debased and redenominated like every other Fiat currency has been. 

When? Who knows. I don’t. But bubble? No, here are the seven things that you have to have to have a bubble. I see one and 2 but not 3-7.

http://www.pacificviews.org/weblog/archives/003679.html

Stage One – Displacement

Every financial crisis starts with a disturbance. It might be the invention of a new technology, such as the internet. It could be a shift in economic policy. For example, interest rates might be reduced unexpectedly. Whatever it is, the world changes for one sector of the economy. People see the sector differently.

Stage Two – Prices start to increase

Following the displacement, prices in the displaced sector start to rise. Initially, the price increase is barely noticed. Usually, these higher prices reflect some underlying improvement in fundamentals. As the price increases gain momentum, people start to notice.

Stage three – Easy Credit

Increasing prices are not enough for a bubble. Every financial crisis needs rocket fuel and there is only one thing that this rocket burns – cheap credit. Without it, there can be no speculation. Without it, the consequences of the displacement peter out and the sector returns to normal.When a bubble starts, the market is invaded by outsiders. Without cheap credit, the outsiders can’t join in.

Cheap credit is the entrance ticket for outsiders. For example, gas prices have risen sharply in recent years. However, banks aren’t giving out loans so that people can store gas in their garages in the hope that the price will double in three months. The banks, however, are prepared to give loans to people with poor credit to hold condos in the hope that they can be quickly flipped.

The rise in easy credit is also often associated with financial innovation. Often, a new type of financial instrument is developed that miss-prices risk. Indeed, easy credit and financial innovation is a dangerous cocktail. The South-Sea Bubble started life as new-fangled legal innovation called the limited liability joint stock company. In 1929, stock prices were propelled into the stratosphere with the help of margin calls. Housing prices today accelerated as interest-only mortgages emerged as a viable means for financing overpriced real estate purchases.

Stage Four – Over-trading

As the effects of easy credit kicks in, the market starts to overtrade. Overtrading stimulates volumes and shortages emerge. Prices start to accelerate, and easy profits are made. More outsiders are attracted, and prices run out of control. Accelerating prices attract the foolish, greedy and the desperate to enter the market. As a fire needs more fuel, a bubble needs more outsiders.

Stage five – Euphoria

The bubble now enters its most tragic stage. Some wise voices will stand up and say that the bubble can no longer continue. They put together convincing arguments based upon long run fundamentals and sound economic logic. However, these arguments evaporate in the heat of the one over-riding fact – the price is still rising. The wise are shouted down by charlatans, who justify insane prices by the euphoric claim that the world is different and this new world means higher prices.

Of course, the “new world” claim is true; the world is different every day, but that doesn’t mean that prices run out of control. The charlatan wins the day and unjustified optimism takes over. At this point, the charlatans bolster their optimism with the cruelest of all lies; when prices finally reach their new long run level, there will be a “soft landing”. The idea of a gentle deceleration of prices calms the nerves.The outsiders are trapped in knowing denial. They know that prices can’t keep rising forever, but they rarely act on that knowledge. Everything is safe so long as they quit one day before the bubble bursts.Those that did not enter the market are stuck in a terrible dilemma. They can not enter but neither can they stay out. They know that they have missed the beginning of the bubble. They are bombarded daily with stories of easy riches and friends making massive profits. The strong stay out and reconcile themselves to the missed opportunity. The weak enter the fire and are damned.

Stage Six – Insider profit taking

Everyone wants to believe in a new brighter future but a bubble takes that desire and turns it upside down. A bubble demands that everyone believes in a brighter future, and so long as this euphoria continues, the bubble is sustained.However, as madness takes hold of the outsiders, the insiders remember the old world. They lose their faith and start to panic. They understand their market, and they know that it has all gone too far. Insiders start to cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away with it. Other times, the outsiders see them as they leave. Whether the outsiders see them leave or not, insider profit taking signals the beginning of the end.

Stage seven – Revulsion

Sometimes, panic of the insiders infects the outsiders. Other times, it is the end of cheap credit or some unanticipated piece of news. But whatever may be, euphoria is replaced with revulsion. The building is on fire and everyone starts to run for the door. Outsiders start to sell, but there are no buyers. Panic sets in; prices start to tumble downwards, credit dries up, and losses start to accumulate.

Here is the paradox of all bubbles – everyone knows how the fatal combination of easy credit, overtrading and euphoria will affect prices. Minsky didn’t need to write down a thing about the madness of speculation. America’s investors have a lifetime of experience. Within the space of five years, America moved from the tech stock bubble into the real estate bubble.Today’s housing prices are grossly overvalued. Everyone knows that prices will collapse. It might be tomorrow, or it might be two years from now. One thing, however is certain, the longer it takes for the bubble to burst, the more painful it will be. 

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