Gold – The Utimate Bubble?

Jonathan Burton has an interesting piece at MarketWatch Saturday morning. San Fransisco based Burton, the website’s money and investment editor, argue that investors are being lured into a speculative gold bubble comparable with the oil spike of 2008. Mr. Burton points out that gold in reality is an insurance against a total market collapse and other catastrophes, and that an even higher gold prize means that the value of most other assets will crash.

“Gold buyers beware — the karat can be a sharp stick. As with any speculation, gold can lose luster as fast as hedge funds and other traders can unload it.”

Jonathan Burton


Rate hikes are kryptonite for gold; accordingly, concerns that China will move aggressively on rates, and that the US and developed Europe will ultimately follow, have dulled gold’s glimmer over the past week, Jonathan Burton at MarketWatch writes.

Gold has become highly prized bling-bling, with the prize per ounce reaching another all-time-high this week at 1.395 dollar per ounce.

Anxious and astute buyers, from hedge-fund players to central bankers, flock around the “currency of fear.”

Gold at around $1,400 an ounce is almost double what it commanded two years ago, and gold’s price is up almost 25% so far this year alone.

“It’s been a great ride. Except gold is a bad investment,” Mr. Burton states.

Adding: “Gold’s feverish run has made a lot of people a lot of money, and though the rally has taken a breather in the last few days, there’s no shortage of flag-waving supporters who claim gold is on a march to $1,600, $1,800, $2,000 and beyond. After all, gold is still well below its 1980 peak, when it was worth around $2,300 an ounce in today’s dollars.”

Pure Speculation

The MarketWatch editor also emphasise that the recent raise in gold prizes is caused by nothing else than pure speculations.

“Certainly there are reasons to own gold in a diversified portfolio. Yet gold isn’t like a stock or a bond. It offers no income, no dividend, no earnings. It is considered a store of value, an alternative currency that’s safe beyond reproach, but it is not cash in the bank, or even the mattress. Gold has no untapped intrinsic value; it is worth only what people are willing to pay for it. And lately, many people have been only too willing,” Jonathan Burton writes, backed up by the following quotes:

“Gold is going up because people are buying it, and people are buying it because it’s going up.” (Leonard Kaplan, president of Prospector Asset Management).

Gold is always a speculation. (James Grant, editor of Grant’s Interest Rate Observer).

“Gold may be a good speculation; even cautionary voices concede that gold is not yet displaying the parabolic hockey-stick pattern that frequently forms an ugly bubble. Low yields on safer assets such as bonds and cash encourage risk-taking and speculation, which favors gold, silver, metals, commodities and many stocks. If the U.S. dollar continues to decline, gold will be a main beneficiary,” Burton continues.

According to the last disclosure in June, the three giant hedge fund managers, George Soros, John Paulson and Eric Mindich, controls 10% of the worlds leading gold ETF, SPDR Gold Trust.

Of course, they staked their claim early, and their view on gold and the dollar may now have changed, as investors will soon discover when these influential funds release Sept. 30 portfolio holdings.

“But gold buyers beware — the karat can be a sharp stick. As with any speculation, gold can lose luster as fast as hedge funds and other traders can unload it,” Burton warns.

The Greater Fool Theory

To Jon Nadler, senior analyst at Kitco Metals Inc. and a veteran gold-market watcher, Wall Street’s buy recommendations remind him of speculation in 2008 that propelled another must-have commodity — oil, the “black gold” — to stratospheric heights.

“I don’t think gold is an opportunity at $1,400 an ounce,” Nadler says. “Just because gold has been above $1,000 for 14 months, everybody thinks it’s a new paradigm. This is very much what we heard about oil a couple of years ago.”

“An investment is something you buy near its value. If gold costs $450 or $500 to produce, at $1,400 you don’t have value, you have momentum.” (Lenord Kaplan at Prospector Asset Management).

Perhaps Leonard Kaplan at Prosoector Asset Management clarifies the issue best: “Gold at $1,400 is not what I would call an investment. An investment is something you buy near its value. If gold costs $450 or $500 to produce, at $1,400 you don’t have value, you have momentum.”

And as any experienced trader should know by now – momentum is just another word for the greater fool theory. (The strategy of buying with no other intent than selling at a higher price – until the rally stops and the greatest fool is not able to find any new buyers).

It is similar in concept to the Keynesian beauty contest principle of stock investing.

An Insurance You Don’t Want To Use

“I called gold the ultimate bubble, which means it may go higher,” Soros told an investor conference in New York in mid-September, repeating a warning he’d made earlier this year. “But it’s certainly not safe and it’s not going to last forever.”

The recommended strategy at the moment is to hold between 5 and 10 percent of a clients’ portfolio in gold.

But this is not a new strategy. In fact, it’s an essential part of the old school investment lesson on long-term planning,  designed to expect the unexpected.

“If it works really well, chances are the other things in the portfolio aren’t going to be looking so good.”  (Karl Mills, president of investment advisory firm Jurika, Mills & Keifer.)

“We actually hope it doesn’t work too well,” Karl Mills, president of investment advisory firm Jurika, Mills & Keifer. says. “If it works really well, chances are the other things in the portfolio aren’t going to be looking so good.”

Jonathan Burton

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“Indeed, that’s how most individual investors should look on gold, as a way to mitigate investment risk — and an insurance policy you hope never to use,” Jonathan Burton at MarketWatch concludes.

Well, that’s actually how it’s always have been, and always will be.

PLease, don’t forget that.

Now, read the full story at www.marketwatch.com.

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