Why does gold look like a bubble?

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Darkandscary's picture
Darkandscary
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Joined: Sep 8 2008
Posts: 1
Why does gold look like a bubble?

 I have endlessly been reading about the value of gold and how it is a very good hedge against inflation etc.

But looking at the gold price chart (especially the 20 years one), it looks exactly the same as all those presented by Chris in his crash course segment about bubbles.

http://www.usagold.com/gold-price.html

 Now I'm also aware of the difference between the "paper" market for gold vs the physical one, and that one reason the gold price might be taking a dive is because of overselling in the paper market. Many people believe that the gold price will skyrocket when there are delivery defaults in the paper market.

Can someone help me get some clarity on this? Can this be just another bubble like so many other assets?

Thanks

jgreco's picture
jgreco
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Joined: Aug 9 2008
Posts: 31
Re: Why does gold look like a bubble?

In the short to mid term gold is crashing.  Why? Most importantly:

1. Deflation.  It doesn't matter what you think about the long term prospects of inflation vs. deflation.  There is no denying that we are experiencing deflation, as defined by Austrian economics, now and will be for many years.  The housing problem ensures it and the Government can't print money fast enough.  Prices on all assets will fall as an effect of lowering the amount of money and credit available.

2. Hedge funds, pension funds, and investment banks are liquidating assets that can sell in a massive deleveraging campaign.  Gold is a highly liquid asset and these institutions need the cash.

3. Commodities are out of style.  Professional investors are no longer interested in investing in them.  You don't buy when its  going out of rotation.

 

Golden Age's picture
Golden Age
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Posts: 61
Re: Why does gold look like a bubble?

Because you are looking at the wrong picture.  The sad truth today is that most Americans only read the Headlines and never read the story behind them.  We have become a nation of sound bites rather than taking the time to investigate what is happening and why. 

I will tell you what I have done and then you can decide if that is right for you.  I became concerned about our economy and wondered how I could figure out for myself what was going on and what I should do to protect myself.  I read one of the Dummy books, because that is what I was.  "Investing in Precious Metals for Dummies."  Excellent starting point and lots of excellent suggestions on what to do next.  Then I read "The ABC's of Gold Investing by Michael J. Kosares.  I then read the book by James Turk and John Rubino, "The Collapse of the Dollar."  Next was the book by Howard Ruff, "How to Survive in Tuff Times." Howard is probably the most widely read author on financial counseling in the U.S., at least his books are the best sellers.  After reading these books I was fortunate to find the Chris Martenson web sight and this web sight is a must watch, "Crash Course."  

The person most interested in your financial well being is yourself.  DYODD.  Do Your Own Due Diligence, educate yourself.  When you are satisfied that you know the course of action you are going to take, and you know why you are taking that course of actions, you then will not be subject to what other people opinions are or what the fluctuations of the Stock Market are.  

If you are not willing to invest your time in educating yourself, you are subject to what others opinions are and you will be blown from one get rich scheme or safe haven to another.   Good luck with that. 

scotttherrien's picture
scotttherrien
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Joined: Aug 26 2008
Posts: 13
Just look to the Euro-US dollar relationship

I agree with the above and will add one more...

IMHO, it seems that GOLD is NOW primarily driven by the relationship between the US dollar and Euro.  There has been a very strong correlation between the strength of the US dollar vs the Euro and price of paper gold (run the charts on Bloomberg for the last two months - it's eye popping).  The stronger the dollar the weaker paper gold becomes.  Given that the financial crisis has spread across the globe, it appears Europe and some parts of Asia are or will be in worse shape than the US, making the US dollar stronger resulting in Gold's plummet.  This may continue for a while, as more and more non-us currencies lose value... 

However, the dollar's strength will only last for so long...when the tide changes, it may result in explosive growth in the value of paper gold.  

I've read that a good re-entry point to gold may be in the $600-$700 range...but this all depends on the Euro-US dollar tide...

john50's picture
john50
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Joined: Sep 2 2008
Posts: 74
Re: Why does gold look like a bubble?

Gold peaked from a long bull run since 1998 on March 17th 2008 - on the same day as a secondary high in the S&P 500. Markets do not go int the same direction forever, they need a correction or breather, and gold is going through that now. Prices will retrace previous gains, it is a declining market trend for now. Expected bottom is below $700, closer to $600, which could be in place in a week at this rate, gold fell $200 in the past 10 days.

I am a gold bug, and have collected bullion since the mid 1970s, and trade gold as a commodity full time for an institution, so I like gold, but it is not for everyone. Most people need to look after all the basics first (cash, emergency food, etc), before taking on gold. Why? because it only serves you during a severe crisis, so 99% of people sell their gold at a loss when they grow tired of it and did not plan out their short term needs. As a hedge against inflation, or a speculative investment, gold has been difficult, alluding most people's expectations. I am not against gold, I am against the thinking that gold is the best thing during a deflationary crash. Be Patient. Most gold buyers have visions of anarchy, or delussions that gold is going to $3000 in a few months, that could happen, but do not bet the farm on it, take a balanced approach, and only what you can afford to have tied up for a decade or longer.

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Oct. 22 (Bloomberg) -- Gold is for rich guys -- buying physical gold, that is. The metal's highest and best investment use is as insurance policy against a currency collapse. For that purpose, you need a lot of it, stored around the world. Owning 20 or 30 coins is nice but won't protect your standard of living in a world where dollars are dust.

Gold isn't even a reliable hedge against inflation. It reached $850 an ounce in January 1980, a price not seen again until January 2008. During those intervening 28 years, gold plunged and reared but lost more than half of its purchasing power. For a 1980 investor to break even after inflation, gold would have to reach $2,200.

It might, but how long did you plan to wait?

For the average investor, gold boils down to a speculation on higher prices. The latest run-up started in August 2007, when the housing market visibly started falling apart. From $652, it raced up to $1,003 an ounce last March, zig-zagged back to $747 in September, jumped to $905, then slid to $772 as of yesterday.

Hedge funds drove the market but individuals jumped in, too. So far this year, investors have purchased 611,000 newly minted, one-ounce U.S. gold coins, compared with 315,000 in all of 2007.

``We've seen a switch in appetite, with investors moving from futures to physical gold, either owning it directly or going through exchange-traded funds,'' says Suki Cooper, an analyst at London-based Barclays Capital.

Coins purchased strictly for their gold value, not their numismatic value, are known as bullion coins. Many countries mint them -- South Africa (Krugerrand), Canada (Maple Leaf), China (Panda), Austria (Philharmonic) and Australia (Kangaroo), among others. The U.S. Mint makes Buffalos and American Eagles. For investment purposes, you want the one-ounce size.

Supply Shrinks

That is, if you can find them. The yearlong run on bullion has dried up the supply of coins for immediate delivery. Everything was out of stock last week at the online dealer onlygold.com. Kitco.com had Maples at 7 percent more than the spot gold price.

``The premium will likely come down 1 or 2 percent when all coin supplies improve a bit,'' says Jon Nadler, senior analyst for Kitco Metals & Minerals in Montreal.

The various mints project the number of coins they expect to sell each year and produce on demand. Toward the end of each year, they let their inventories run down while gearing up for next year's run. The surge of buyers left them short of high- quality blanks.

Currently, the U.S. Mint is striking only a limited number of 2008 Eagles. The wholesalers are on allocation. No Buffalos are being shipped at all, although a small number might still be minted before the end of the year. By late December, dealers expect to start receiving 2009 coins.

Coin of the Realm

For U.S. investors, American Eagles are the bullion coin of choice. You can put them into individual retirement accounts as long as they remain in their original U.S. Mint capsules. (It's not clear that Buffalos are allowed.)

Eagles also slip through a loophole in the tax reporting law, says Scott Travers, author of ``The Coin Collector's Survival Manual.'' Dealers have to report to the Internal Revenue Service if you sell 25 or more Maples or Krugerrands. They're not required to report your sales of American Eagles and some other coins, although some may do so. (Kitco, in Canada, says it does no tax reporting at all.)

Normally, one-ounce Eagles sell for 5.5 percent to 7.5 percent over the gold price, Nadler says. Small dealers might mark up the price even more.

In this buying panic, I saw online dealers charging as much as 13 percent more than spot gold. Their Web sites warned that there might be a wait before your Eagles could be shipped.

Fool's Gold

On EBay and the Home Shopping Network, coins sell at fantasy prices. A set of Eagles in four different weights was offered on HSN at $4,999.99. In gold, it's worth about $1,450. Prices like these take advantage of neophytes. A coin dealer might sell a four-coin set for $1,850, Travers says.

A cheaper way of buying gold is through an exchange traded fund. The most widely traded fund, SPDR Gold Shares, costs 0.4 percent a year in fees, plus your brokerage commission. You don't own the gold directly. A trust holds large gold bars (warehoused principally in London) and sells shares against them, which are traded on the open market. You can't redeem in gold itself.

It costs even less to buy bullion in a pool account, such as the ones offered by Kitco. Like an ETF, a pool account sells shares in a large bar of warehoused gold. You pay just a hair over the spot gold price, and sell it back to Kitco for just a hair under. There are no annual expenses. For a fee, you can redeem in gold itself. As with ETFs, you depend on the pool's trustee to support its guarantee.

Gold, by the way, is taxed as a collectible -- whether you buy it in the form of coins, ETF shares or an interest in a pool account. Your tax rate on long-term capital gains would be 28 percent, compared with 15 percent on other assets. Only a significant price gain (or currency collapse) redeems your bet.

 

http://www.bloomberg.com/apps/news?pid=20601212&sid=ae.xb05JePEE&refer=home

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