Tuesday, September 22, 2009

Is There a Gold Bubble?

September 22, 2009
Gold's No Bubble - David Serchuk

It's tempting to consider gold overbought. It currently trades at $1,017 an ounce, an all-time high. It's survived two asset bubbles with flying colors. It sells for three times its April 2001 decade low of $255 an ounce.

Two quick comments.

First, when people tell me that something is not a bubble and state it as fact, then I tend to get a bit nervous.

Second, since when is 3.988 times ($1,017 / $255) rounded down to "three times"? Call me crazy, but I might be tempted to actually round up.

Before you continue to call me completely crazy though, consider what this VERY same author wrote just over three years ago.

May 8, 2006
Make Money In Real Estate - David Serchuk

That sound you hear is the real estate bubble popping. Or so thinks Wall Street. When new home sales slipped 10.5% in February, it gave fresh evidence of the long-expected end to the housing boom. Homebuilder stocks are down as a result. Maybe that's unjustified: The big builders will tell you that an industrywide falloff in home starts lets these well-capitalized companies steal market share from the small-time developers, who are still numerous.

Yes, that's right. He was heckling the popping of the housing bubble and told us we could make money in real estate. How did that work out?

In my opinion, in order to justify gold's current price then inflation better show up at some point. Further, if inflation does show up there are probably better things to hoard than something that has already risen by a factor of four. Toilet paper continues to come to mind. Just a thought.


I know this isn't going to be popular with the gold bugs, but I just call it like I see it. I'm not saying gold is in a bubble, but I certainly have no interest in buying it (again) at these prices. There is serious risk at these levels and that is not something I look for in a "safe" store of value. Maybe that's just me.

Of course, we'll know one way or another in the coming years. It will be interesting to see what happens.

6 comments:

Stagflationary Mark said...

Bonus tidbit...

http://dollarwiseblog.dallasnews.com/archives/2009/09/selling-gold-if-dollar-falls.html

"Question:

I have a problem calculating the effect upon gold holdings if there should be a devaluation of the dollar.

Example: Say I hold $100,000 worth of gold bullion, which I originally purchased at an average market value of $95,000. Before I can sell my holding, the dollar loses half of its value. This means that my gold bullion is now worth only $50,000."

I am SO bashing my head against my desk right now.

I never thought I would say this, but some people really should put their money in the bank and cross their fingers.

mab said...

Stag,

In my opinion, in order to justify gold's current price then inflation better show up at some point.

Yeah, rampant inflation should be just around the corner now that wages are falling and the CONsumer's major source of collateral (the house) is in excess supply, is falling in price and has less owner's equity attached to it than ever before.

I really have a difficult time accepting the case for demand based inflation.

Dollar devaluation is an interesting point though. I can easily forsee Bernanke devaluing the dollar to prevent deflation. That's what happened during the Great Depression and gold did indeed increase in price relative to dollars. But from an American consumer's perspective, preventing deflation is not the same thing as causing high or hyper inflation.

I still think the TIPS markets have it about right - low real growth and low inflation ahead. And, imo, the risks are to the downside of the TIPS forecast. It's tough to row against a tide of credit defaults.

Woah. My word verification is "frail". How fitting.

Stagflationary Mark said...

mab,

I had one of those word verification moments recently. I posted a comment at MaxedOutMama and my word was "andst". I joked that it was SO close. I was actually feeling angst! The topic was health care/insurance.

The posting volume on Yahoo's message boards is....

Very heavy for GLD and SLV (physical gold/silver ETFs).
Very light for TIP (treasury bond fund with inflation protection).
Virtually nothing for IEF (treasury bond fund without inflation protection).

1. Everyone seems to have piled into the same side of the "sure thing" trade.
2. As hard as this is to believe, how can there be a bubble in IEF if no investors are willing to talk about it?
3. Minor oil sell off today based on supply/demand fundamentals. Hard to see much inflation if THAT continues.

mab said...

Stag,

2. As hard as this is to believe, how can there be a bubble in IEF if no investors are willing to talk about it?

Rates are low based on the recent past, but are nowhere near historic lows.

http://research.stlouisfed.org/fred2/series/AAA?cid=119

http://www.businessspectator.com.au/bs.nsf/Article/Lacy-Hunt-$pd20090129-NR997?OpenDocument#According

The stock price bubble deflated, the commodity price bubble deflated, the house price bubble deflated but somehow the credit bubble didn't deflate. We shall see.

In any event, it looks to me like it's more fun to be a spectator in this epic battle between deflation and anti-deflation than a participant.

Stagflationary Mark said...

mab,

"In any event, it looks to me like it's more fun to be a spectator in this epic battle between deflation and anti-deflation than a participant."

You've got that right! I'm actually feeling rather good about my TIPS position these days. I can pray for deflation while bracing for inflation. Only hyperinflation ruins me. What's not to like?

getyourselfconnected said...

Oh man!