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TMFGreenwave (33.34)

Evidence We're in a Gold Bubble?



June 17, 2009 – Comments (12)

Now I’m normally not one to disagree with friend and colleague Chris Barker aka TMFSinchiruna on, well, just about anything metallic that comes out of the ground, but I am going to raise my hand and “ask are we sure we aren’t in a bubble?” Because I’m seeing some bubble like behavior out there.

Chris eloquently and thoroughly articulated why you should own gold in his fantastic 2 part series The Top 10 Reasons to Hold Gold, Part 1 and The Top 10 Reasons to Hold Gold, Bar None.  He even went the next step to debunk 5 popular gold myths.  That said, we should step back periodically from all of the fundamental reasons for gold’s ascent and look at what is going on around us.

Sitting at home tonight, longingly reminiscing about the good times (oh, how I miss my 07 portfolio balance) and pondering our bubble-hopping natures, I recall investing clubs in the tech boom and cheap late-night mortgage commercials that could be, at best, described as predatory during the real estate boom.

So as I surf the series of tubes known as the interwebs while glancing at my TV, I’m simultaneously hit by 3 related investing red flags.  Individually I might have disregarded them, but together I’m struck with a familiar feeling: I can’t lose money with investment x because this time, its different!

The three horseman of the potential gold apocalypse are:

1.    Cash 4 Gold (and similar companies)
2.    Gold Parties
3.    Gold Vending Machines

We’ve seen “get rich” TV commercials before and we’ve seen social gatherings based on the newest fad to hit suburbia before.  But vending machines?!? And I'm not talking about vending machines that are gold colored, or even made of gold.  No no, I'm talking about machines that dispense gold.

You mean I can buy gold at 500 locations in Germany for only a 30% mark-up over the spot price?  What a deal! 

Way to think outside the box German goldentrepreneurs. I take my jester cap off to you for your over the top display of naked capitalism combined with asset class bandwagoning.

Now I’m not saying we are in a gold bubble, I'm just saying this behavior looks awfully familiar too me.

12 Comments – Post Your Own

#1) On June 18, 2009 at 1:04 AM, RVAspeculator (28.48) wrote:

Items 1 and 2 are ways for the rich to get the gold from the poor who have fallen on hard times in this economy. The fact that the poor all are dumping every scrap of gold jewelry to these "Cash 4 Gold" places to me says the common person is SELLING gold and not buying.  Only item 3 is related to getting the public to buy gold and since its some obscure thing in Germany I had not heard about it.

The only thing holding back the gold market in my opinion is every time we get near $1000 the IMF announces another MEGA gold sale.   I just wonder how many times that trick will work.

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#2) On June 18, 2009 at 1:14 AM, checklist34 (98.40) wrote:

i'm curious about htis too.

I have no comment pro or con on the fundamentals of gold, i'm not an economist...  i just get skeptical about gold because it has that "everybody" is into it thing going on.  Its in, its hot, its chique...  and that gives me pause. 

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#3) On June 18, 2009 at 1:42 AM, FreeTruth (< 20) wrote:

The interesting thing with gold is that it is a finite resource that producers have convinced the populace as a whole is rare and worth sizable sums of money. Much like diamonds, it is valuable because we believe there isn't much of it out there. Again, like diamonds, we all believe it is rare when in fact these items float by us constantly each day. Unlike most other commodities, nearly all people own it and could technically convert it for paper cash. The greatest fear we all should have as speculators is the impact of a populace in need of cash dumping their incredible supply on the open market. There is plenty of supply, it is just in the form of rings, earrings, braclets, etc. 

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#4) On June 18, 2009 at 1:43 AM, kaskoosek (30.25) wrote:


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#5) On June 18, 2009 at 2:13 AM, checklist34 (98.40) wrote:

kaskoosek, that may well also be. 

but for gold to be a good investment, it'd have to hold "buying power" constant as the dollar falls.  Gold going to 1200 doesn't mean you've made money, ... a fact that stock market bears love to say about stocks at times.

its not impossible that we have a gold bubble and a dollar bubble at the same time.  Is gold really what you want to hold as a dollar-bust play?

or is naturla gas (all time low relative to oil), silver (all time low relative to gold), coal, wheat, pork bellies

see what i mean?  EVEN IF the dollar goes weak and gold goes up, that doesn't mean it ISN'T in a bubble or that holding it makes sense.

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#6) On June 18, 2009 at 7:48 AM, XMFSinchiruna (26.50) wrote:


I hadn't heard about the gold vending machines in Germany ... that's pretty funny. :) I hope they have some security associated with the machines. 

Thanks for your kind words about the recent gold articles ... I'm glad you enjoyed them!

I echo RVA's comments regarding the first two items. Many people have expressed a similar suspicion that these phenomena are early bubble indicators, but as RVA points out they are nothing more than cunning attempts to divorce people from their gold for pennies on the dollar. If this were the reverse ... if the gold parties like tupperware parties, and if cash4gold were gold4cash, I would agree with you that the phenomena indicated some froth.

The beauty of fundamental analysis is that as an investor you don't have to be anxious about the potential for a bubble. Had investors performed a similar analysis of the housing market, let's say around 2005, like me they would have run for the exits. Bubbles exist only where there are no underlying fundamentals to support the rise, so as long as one's analysis is thorough, there is zero risk of a bubble.

Now, one can run into trouble with the word 'bubble' since corrections (even minor ones) are occasionally mistaken as bubbles. From the recent post linked above:

"The crowded nature of the trade may affect the dynamics quite drastically, but where such movements are fundamentally based, that condition will not affect the direction. Only a substantially repaired U.S. balance sheet and a restored USD can achieve a reversal of the precious metals bull market."

And this from a blog post I wrote in March 2008:

"First, gold is not a bubble... bubbles are fundamentally weak markets that gain lofty valuations through idle speculation and then come crashing down to earth.  The housing bubble was a bubble because the equity people presumed as real was but illusion."

'Gold is the opposite... it is fundamentally strong, and is enjoying a 6-year secular bull market as a response to the housing bubble and everything else that's broken in the U.S. economy.  The billions of dollars that the Fed is printing to prolong the inevitable de-leveraging of the financial markets is the strength of gold going forward.  To presume an end to the gold bull we would have to see a meaningful reversal in the dollar, and the puny little recovery there in the past few days is wholy unconvincing.  Show me meaningful technical and fundamental support for the dollar, and I'll concede the run is over.  But I'll save you the trouble.. there is nothing supporting the U.S. dollar!"

Thanks for the discussion! It's important for Fools to consider such matters at this particular juncture, when I believe gold is experiencing one final corrective move before taking out $1,000 in bold fashion. No doubt, some will fear that $1,000-plus is bubble terriroty. All I can do is urge Fools to stick with the fundamentals ... over the long-term they always hold sway even over successive waves of speculation and correction that may occur within the longer trend. Volitility will only rise from here, with $100+ daily price movements in gold eventually becoming quite common. As hedge funds and their algorithms start to play a larger role in this very small market, the volatility could become epic. Again, more talk of bubbles will emerge then, but if the debt-to-GDP of the U.S. is continuing to rise in a setting of quantitative easing, Fools will know that the multi-year bull market trend carries on.

Fool on!

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#7) On June 18, 2009 at 7:54 AM, XMFSinchiruna (26.50) wrote:


Silver and the commodities you mention are nice dollar-defensive plays as well, but in response to your question: Is gold really what you want to hold as a dollar-bust play?

Yes, as the only unbreakable currency, gold is precisely what you want to hold as a dollar-bust play.

Its not impossible that we have a gold bubble and a dollar bubble at the same time.

With all due respect, that is in fact quite impossible.


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#8) On June 18, 2009 at 8:11 AM, XMFSinchiruna (26.50) wrote:


The greatest fear we all should have as speculators is the impact of a populace in need of cash dumping their incredible supply on the open market. There is plenty of supply, it is just in the form of rings, earrings, braclets, etc.

FreeTruth, the investment demand for physical gold would soak up the nation's jewellry supply without so much as a blink of an eye. If central banks can unload massive quantities (like the IMF's recent sale) without sending prices substantially lower, then gold investors have nothing to fear from these kind of retail gold divestment trends. If this were India, such a move might cause a hiccup, but even then would not roil the trend.


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#9) On June 18, 2009 at 8:43 AM, kaskoosek (30.25) wrote:



I can understand where you are coming from and I agree with you that gold is expensive relative to other commodities HOWEVER....


Gold is easily stored while oil and gas are not. Sorry, but futures are a crappy way to capture the increase in price.

All the people buying futures are taking on a huge risk, the supply and demand equation might take some time to correct. And if so, they could loose on contango and other fees.


Now to equities. Even if the dollar depreciates immensly, a lot of companies could still go bust. That is a huge risk right there. While  gold, carries no risk in such an enviroment.

Going back to silver or platinum. Yes these are very good alternatives.


Now on to an important subject. You have been brainwashed for too long to beleive that a currency backed by hot air actually has an intrinsic value. At some point in time when trust in fiat is lost, precious metals will have to take its place. When a huge influx into these commodities happen you will become extremely rich, because very few people hold them relative to the people holding dollars.



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#10) On June 18, 2009 at 9:02 AM, minduza (< 20) wrote:

I would say we are not even close to the bubble. To 99% of people I know  gold is jewelry and not investment. Talking about real estate bubble 99% were buying/selling or were thinking about doing something with it.

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#11) On June 18, 2009 at 11:22 AM, FreundInvesting (28.63) wrote:

"To 99% of people I know  gold is jewelry and not investment."

I hope you're not basing your investments on the above statement.

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#12) On June 18, 2009 at 2:20 PM, rofgile (99.04) wrote:

Those vending machines would be a great way to launder money.  Just enter your stolen cash, etc - get out gold.  You could then melt down the gold and destroy all traces of the transaction.

That would seem to be the major plus of these machines - and as such, I would think they won't last long before governments step in and outlaw them.

I wonder what you have to pay to get a chuck of gold out of the machine, and how big of a chunk you get.

I saw one poster on slashdot making fun of this - what happens if your chunk of gold gets stuck in the machine - how do you get your money back, etc?

--> I think this all points out again, that it is a fantastic time to start shorting the gold bubble <--

--> The silver bubble in the 70's ended when it became commonplace to send in silverware to get melted down for money ---> now we have Gold2Cash or whatever for gold.  These should be big warning signs to anyone buying gold.

I'm in to making jewelry, and I realize that its a terrible time to buy gold for jewelry - there is such a large chance that a year or two from now anything I made from gold will be worth much less.  Therefore I make things out of silver instead.  High prices for gold will kill all normal demand - leaving just the crazy "investors". 

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