This is part II because back in March I wrote about a gold bubble. See, back then, gold was playing around the price of $1000 an ounce. I likened that price to $100 a barrel oil back in 2008. I don’t pretend to be a market predictor, but after that article published the price of gold declined from $1000 to the $870s. It was enough to convince me that the price would continue to decline as the economy recovered.
I was wrong. Gold is now trading around $1150. This doesn’t surprise me though. I couldn’t have known back in March that the stock market was about to bottom out and start an insane bull run. But was I wrong about a bubble? I think not.
There is a type of market analysis called technical analysis in which one studies the charts of an investment’s performance. Look at the price of gold over the last year. You can see back in March it was flirting with the $1000 mark. Since the decline into the 870s it has made a steady incline and tested $1000 a couple more times. Once it broke that threshold, it basically just shot up.
Analyzing charts like this is in essence analyzing people. If there is no rational explanation for the change in the price of an investment, I chock it up to the irrational human being. Some may argue there is a rational explanation for gold being the price that it is. Some have argued it will go even higher. Sounds like the same people that said oil was headed to $200 a barrel and would never return below triple digits again. The simple fact that people are trying to justify the price is signal enough for me that the price is too high. But let’s look at a few other things.
Demand for gold jewelry or gold in industrial applications has had no significant change to warrant the price movement. This means that something else is driving up the price. What could it be? Investors of course! The stock market has had a good run, maybe many think that the run is over and want to move into something else? Gold works there. Maybe people think that the dollar is going to be devalued further and want a safe hedge from economic collapse? Gold fits.
All this points to fear. For one reason or another, investors are afraid. A cardinal rule of investing is to keep emotion out of your decisions. Diversify across multiple assets, and know your risk profile. If you think the market is going to move down, you should already be prepared to ride the wave or be in bonds and avoid the loss altogether. Regardless, when people are running out of a burning building, that means it’s time to run in.
What always gets me, is this false belief that gold is still important to the world economy. It’s not. Gold used to be a rare metal that served as a valuable currency across the world. Now it’s a soft metal that simply looks pretty. Do people really believe that will carry value in an economic collapse? Who is going to buy it from you? Invest in some skills that might make you useful in a barter society.
Gold lovers argue gold always has value. This is contrary to currencies which are as only as valuable as that country is trustworthy to meet debt obligations. In other words, a currency is only valuable if other people believe it is. Well the same applies for gold. It’s only valuable if other people think it is. Trust me, if that theory is ever tested, you’re going to find a lot of people sitting on worthless metal. Gold is only valuable today because people still think it is.
So it is again, with great pleasure that I tell you to ignore everything you hear about gold. Only if you have $1 million or more should you even consider it as an investment (due to the low correlation with the market) but even then it should only be a tiny portion of someone’s portfolio. Gold is valuable to jewelers, dentists, and a couple other applications. As money, shnopes.
Photo: bullionvault
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I get my news from various outlets and I can’t remember where this came from (CNBC, online articles, NYTimes, WSJournal, I can’t remember). But the advice was that people are still buying gold and that is why the price will continue to go up (at least in the near future). The article didn’t say that people are using gold to make stuff, but that they were buying it in hopes it would continue to go up. That is no way to invest – it makes gold nothing more than a collectible.
I prefer to buy commodities that are being used in business because their prospects of growth are so much better. If something is being bought just to have it is a collectible and nothing more than a Beanie Baby.