Long written off as the stuff of ‘goldbugs’ and conspiracy theorists (mostly unfairly), gold is coming into its own as a favored investment. Monday, gold climbed to an all time high of $1174 an ounce, enough to make many people sit up and take a look. Gold has been in a bull market for a long time… is gold for real, or are we witnessing the third bubble in a ridiculously short time (housing and oil being the others)?
The Case for a Bubble
The more acceptance a commodity or investment receives, the higher the bubble chance rises. More press and rising prices leads to the buildup of something that can almost be described as hysteria in the markets. When too many people are betting on a ’sure thing’, that’s a good sign the sure thing will soon show some cracks or signs of weakness. As I mentioned before, when the momentum is building and major publications are in on the deal, the signs are even clearer. Fundamentally, it makes sense. The flow of money can be thought of as:
- The Smart Money – Somehow these people/firms guessed/knew where to be.
- The Early Adopters - These people saw the early signs, before the press picked up on it.
- The Big Players – The first banks, countries, and very rich people move into the trade.
- The Mainstream – Once the mainstream press catches a hold of something, the big inflows begin. This stage is where the hysteria starts. Other big players move in. The smart money leaves.
- The Stragglers – The last few ‘potential customers’ come to the party. The inflows slow down; cracks are showing.
- The Collapse – The house of cards comes tumbling down. The mainstream media says everyone should have seen it coming.
If We’re In a Bubble, Where Are We?
Assuming gold is a bubble (although not everyone, including me, is convinced), we’re probably in step 3. As the MSN article mentions, India and Sri Lanka are among the countries which have imported gold. They could be thought of like “Early Adopting Big Players”. If that’s the truth, this bubble could have a way to go. I hate to mix metaphors, but if the bubble is going to pop… don’t get burned (it doesn’t make sense, I know!). As bubbles are almost impossible to call while they are happening and are only obvious in hindsight, it’s a tough call. Good luck, and be careful. I leave you with this gold price chart, for the recent past.
Flash Player 9 or higher is required to view the chart Click here to download Flash Player now
Interested in what you see? Click here to subscribe to Don't Quit Your Day Job...Related Posts