Greater Fool Theory

"Greater fool theory" is being put into practice on a phenomenal scale

The commodities that would be most adversely affected by the bursting of the China bubble and the consequent reduction in Chinese commodity consumption are the industrial metals. Oil also looks vulnerable to us, but uranium does not because we expect that China's plans to increase its nuclear power generation capacity will remain in place almost regardless of what happens in the real estate market. We doubt that gold would be adversely affected beyond short-term knee-jerk reactions, because gold is mostly held for wealth-preservation purposes and therefore tends to fare relatively well when economic problems abound.

1. Wealth-preservation implies that gold is neither gaining purchasing power nor losing it. However, gold buys a heck of a lot more toilet paper at Costco than it did 10 years ago. It also buys a heck of a lot more real estate. That's not wealth-preservation. That's get rich quick.

2. How much wealth did gold preserve between 1980 and 2000? As seen in the historical gold prices and the consumer price index, less than 25%. That assumes you didn't buy it at the very peak in 1980 of course. That would have lowered gold's ability to preserve wealth to just 15% over the period. Almost anything would have preserved more wealth than that, even salt.

3. Since silver is thought to be partly an industrial metal and partly a precious metal, how much might we expect to see silver fall in sympathy? If silver falls in sympathy, what's likely to happen to gold?

4. Gold and silver were extremely expensive compared to base metals back in October. Just how much higher do investors think they will go if base metals crash?

5. If industrial metals and oil are part of the China bubble story then why would I need gold and silver to preserve my wealth? Cash would seem more than adequate when the bubble eventually pops.

I would absolutely agree that a "greater fool theory" is being put into practice on a phenomenal scale. At least you could live in housing during the housing bubble. You can't even live in gold though. Its only value for "wealth-preservation purposes" is what someone else will pay you for it.

If you are a gold investor, then deep down you secretly hope that you will find someone else much more foolish than you when you decide to sell. It's the absolute truth. The more foolish the better. Been there, done that.