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Proof that gold is in a bubble!



November 09, 2010 – Comments (19) | RELATED TICKERS: GLD , SLV , SLW

Gold.  Shiny yellow precious metal. You make me more confused than any other investment in the world.

How do we value you? After all, you don't do anything.  Your only real use is that we cant make as much of you as we can dollars, and I can only profit from you if someone else is willing to pay me more than i paid for you.  

Do I use the Gold/Dow ratio?  The Gold/silver ratio?  How about the gold/inflation, or gold/money supply?

Why stop there?  Why not the gold/pork belly, gold/world population, or gold/chicken farm ratio (or any other rediculous ratio you can think of).

So far, I've been right/wrong about gold.  I've heard robert kyosaki's, peter schiff, jim rogers, and jim cramers stance on gold, and I''m intrigued.  Then i hear warren buffet and the motley fool, and my decision and reasons are reversed.

 So how can i now have proof that gold is in a bubble?  Well, its not scientific.  I don't have a chart to show you or an expert to give witness.

So what do I have?


Right now, I've got you.  I've got your attention.  My guess is your a gold bug, or a gold skeptic (like me).  Your confused (like me), or fearful about our money supply.  So your reading all you can about gold, looking for "the answer". 

Well, i don't think there is one.

Could gold go to 2,000, 5,000, 15,000?  Of course it could. But i don't think it will.

 See, the reason i think gold is in a bubble is because interest in gold is at an all time high (or at least a 30 year high).   CNBC, ABC, NPR, CBS......everyone is talking about gold.  Everyone is talking about future inflation.  Heck, you are READING a blog post about gold right now.

Now ask yourself, would you be reading this blog if I posted this message in the year 2000 (when you SHOULD have been buying gold).  Or would the title "Proof that TECH COMPANIES are in a bubble" grab your attention?

Same question for 2006?  Or would the title "Proof that REAL ESTATE is in a bubble" done it for you?

My guess is the latter.

Look, i have NO IDEA where gold is going.  $500 or $2000 wouldn't suprise me either way.  All's i know is that I can't measure the price, so i can't know if its going up or down with any confidence.  I also know that i don't UNDERSTAND gold, and as a rule i don't invest in things i don't understand (sounds like that buffett guy, right?).

So, if i were you, and I had 10-50% of my money in gold right now, here is what i do.

1) Don't own GLD or SLV.  Yes, they are good trades, but you can't VALUE them.  If i was bullish on gold, I'd own the gold producers, where at least you can get some sense of value.  To me, the best "gold bug" out there is the motley fools own TMFSinchiruna. He seems smart, and is bullish on gold/silver.   He seems to really like SLW, EXK, CEF & AUY.   If i were going long gold/silver,I'd look there first before GLD/SLV.

2) If your worried about inflation, invest in high quality, dividend paying stocks that get revenue in foriegn countries.  They also need to have strong pricing power to pass on costs.  Think COST, MSFT, INTC, DEO, CHL and the like (my portfolio is full of these guys).

3) If your worried about the demise of the dollar, know this.   The USA may be in trouble, but were in the least amount of trouble compared to the other currencies.  If the dollar goes to 0, who will take our place?  The euro?  They are a mess.  The pound?  Same problem.  Australian/canadian dollar?  Not big enough.  Yen?  Nope, same issues.   Chinese Yuan?  Brazilian Real?  Yes, they are in better shape, but a stronger currency would hurt them very, very badly.


To sum up this post, i don't know where gold is going.  But i do know that attention in it is at a record high.  As buffett said, "be fearful when others are greedy".  Look around. 

Gold is looking awful greedy right now.  That's why I'm fearful.








19 Comments – Post Your Own

#1) On November 09, 2010 at 9:10 AM, FreeMarkets (40.96) wrote:

When my neighbors and co-workers (aka: people NOT interested in finances) start talking about gold, I'll believe we're in a bubble.

Until then, I'm going to follow the advice of people who told us to buy gold in 2000.  Jim Rogers thinks it's time to hold gold and not buy until a dip.  

Plus, as long as helicopter Ben, is printing like a mad man, I'm keeping my gold.

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#2) On November 09, 2010 at 9:13 AM, SkepticalOx (98.36) wrote:

Uh. There's been a lot of talk about gold, just that a lot of those talking heads aren't putting their money where their mouth is. There hasn't been that much money pouring into gold, especially "bubble-level". 

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#3) On November 09, 2010 at 9:32 AM, outoffocus (22.84) wrote:

Buffet broke it down in 3 phases.  His theory of the 3 I's. Innovators, Imitators, and idiots. 

The innovators bought from 300 till 1000.   I believe the imitators are buying now. When you should be fearful is when the idiots start buying.  As Freemarkets said, when you hear the guy at the supermarket cashed out his entire 401k and bought GLD, your neighbor up the road took out a home equity loan and put it all in bullion, your mechanic opened 3 high interest credit cards so he could buy one ounce of gold, its time to sell. 

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#4) On November 09, 2010 at 9:53 AM, XMFSinchiruna (26.55) wrote:

Thanks for an entertaining post. :) I am more understanding of the trepidations of those on the sidelines of gold and silver than some might imagine. I don't envy the position of someone on the sidelines today. It's very scary getting into an asset class that's this hot.

I encourage you to start asking around among your friends and family whether they own stakes in gold or silver. I think you'll find there is a massive disconnect between the amount of media attention the metals are receiving, and the actual prevalence of the asset class among allocations of retail investors.

Take it from someone who does understand gold. We are a world away from any terminal stage of this secular bull market. This isn't 1980, it's not the tech bubble, and really it's not like anything we've seen in our lifetimes. If you believe that policy responses to economic crisis will continue to be hyper-accommodative, then continued momentum for silver and gold is a rational corrollary. If you believe the Fed is solving our problems, then you'd be best to steer clear, but if you believe as I do that it is just kicking our problems down the road and permitting them to grow stronger still, then gold and silver have a place in your portfolio. Plain and simple. :)

And yes, for someone just mulling entry into the space today, Yamana Gold is a rather safe vehicle given the very limited downside risk and tremendous upside potential. With the gold:silver ratio approaching 50, much of the relative advantage of silver over gold has been erased by silver's recent surge. Whereas a few months ago I advocated a clear focus on silver over gold, I would now recommend a more balanced 50:50 mix of the 2 metals ... or perhaps 60:40 silver to gold. I think I'm presently 70:30, but I'm likely to shift towards 60:40 over the coming weeks.

There are a few battered names that are deserving of serious consideration at this juncture ... stocks that have been left out of the recent surge entirely. Gammon Gold is one (GRS). Northgate Minerals (NXG) is another.

For more pumped-up returns, that new gold explorers ETF looks sweet (GLDX).

So there you have it, sideliners. Dip a toe in the water, even just a baby toe if your conviction is minimal. Gold is going to $2,000 and higher, with or without you. Silver is going to $50 and higher, with or without you. I, for one, would rather it be with you so we can all look back together with the satisfaction of an adaptation well executed.

Fool on!

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#5) On November 09, 2010 at 9:57 AM, Revler1082 (< 20) wrote:

" I can only profit from you if someone else is willing to pay me more than i paid for you"

How is this not true of any investment?

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#6) On November 09, 2010 at 10:00 AM, starbucks4ever (79.83) wrote:

Hmm, exchanging worthless paper for an equally worthless metal hoping to own some object of value? Looks the definition of insanity.

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#7) On November 09, 2010 at 10:30 AM, XMFSinchiruna (26.55) wrote:


If insanity is a 75% total portfolio gain YTD, then color me crazy.

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#8) On November 09, 2010 at 10:42 AM, starbucks4ever (79.83) wrote:


When you feel a need to boast about your investment, it means you should sell. 

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#9) On November 09, 2010 at 11:10 AM, BillyTG (29.51) wrote:


thanks for taking a brave stance in one of the best performing PM weeks.

What I still don't think the non-"goldbugs" get is that gold is not a cupcake factory or a shoe manufacturer.  It can't be valued the same.  What they also don't get is that what you hear on MSNBC or from Suze Orman or even your cab driver, about gold, does not mean it's a bubble.  Gold is not a US company.  It trades well beyond the borders.  China has been encouraging its citizens to buy gold for a long time now.  And do you think those countries are going to suddenly stop buying gold and go back to the dollar?  So the major players to watch for are COUNTRIES and major purchasers like GLD, which is expected to be buying a lot more physical gold in the near future.

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#10) On November 09, 2010 at 11:12 AM, leohaas (30.08) wrote:

OK, we have heard the bullish perspective for gold (plenty of that here on CAPS), and now we have a gold bear speaking out. Great discussion.

But is it possible that both are somewhat right and somewhat wrong? Can someone argue the middle ground? Someone acknowledging that the accommodating actions of the FED are driving up the prices of all commodities including gold, but not taking that to the extreme that "all that medling will lead to hyperinflation"? I don't have the time since I am working 12 hour days and maintaining 2 households, so it won't be me.


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#11) On November 09, 2010 at 11:55 AM, BillyTG (29.51) wrote:

Leohaas, not it!

I personally like when people cowboy up and put a firm position on the line, rather than hedge their opinions with "well, gold could go to $300 or it could go to $10,000, so maybe have 5% of your portfolio in gold."  That's the Suze Orman method, and to me it clearly indicates someone who doesn't have a clue, so they talk out both sides of their mouth.  Then they can say "I told you so" no matter what happens.  TMFSinch is a freaking Motley Fool hero in my opinion for putting it on the line so long ago and not wavering. 

PS. For those interested, ZH has a great guest article on options, specifically pertaining to gold! 

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#12) On November 09, 2010 at 12:09 PM, VealOssoBucco (< 20) wrote:

Interest in gold is high BECAUSE it makes logical sense to invest in gold when anticipating inflation.  The level of interest for an investment increases throughout its bull market, not just at the top.  Personally, I think silver is a bit more interesting right now.  Here's a good analysis:

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#13) On November 09, 2010 at 1:35 PM, workfor (< 20) wrote:


Zloi - Cute one liners does absolutely nothing for the advancement of the conversation. It looks like the market is and has been figuring out what is of value.Where are your facts please.

The original post states "proof that gold is in a bubble", but where are the facts? It states that "interest in gold is at an all time high", but the price of gold is not at an all time high adjusted for inflation. 2% of investor's money is invested in gold today, while 26% was invested in 1980 during the last bull market. Throughout most of the history of mankind, gold represented 25% of the wealth, but today it represents 1%.

Sinch is right, this is NOT 1980. "History repeats itself, but not exaxtly the same way". In many ways this is better than 1980.

In 1980:

1) The PM bull market was pretty much confined to the U.S. Welcome to the global economy!

2) Some countries like China wouldn't even allow their citizens to buy gold back then. Within the past year the Chinese government swung open the doors and advised their people people to to start buying gold and silver. Talk about pent up demand! Keep your eye on the China factor.

3) There was more gold and silver in the ground to mine back then, and it was much easier to find and cheaper to mine. Remember peak oil?

4) The above ground supply of silver was enormous in 1980 compared to what it is today. There are a lot of commercial applications that have evolved since then, and diminished the supply of silver down to about 2 months worth if all mining of silver were to cease today. Sprott just took 20,000,000 plus ounces from the supply with his new physical silver fund, and thats just for starters. They had to hunt for it, but alas they found it!

5) In 1980 the average person didn't have access to the investment vehicles that are available today. Gold and silver investing is becoming easier all the time. Ever heard of anyone investing in gold and silver in their IRA or 401K? You probably will.

6) In 1980, every cotton picking central bank around the world wasn't printing massive amounts of money AT THE SAME TIME!. But they are today. Remember, gold is traded worldwide today on world wide markets. What happens here affects the other side of the world and vise versa. This is starting to look like a currency war with currency manipulators on all sides. Does it matter who wins the race to the bottom?

7) In 1980 we didn't have an ongoing investigation into "fraudulent and devious attempts to manipulate" precious metals down. Isn't it ironic that since the investigation has heated up, the banks seem to be leaving the battlefield by easing out of those short positions, while the metals march higher.

There are many reasons to believe gold  and silver are not in a bubble.

Congratulations on your gains Sinch. They are to be envied.



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#14) On November 09, 2010 at 5:44 PM, leohaas (30.08) wrote:

Billy, I'm not hedging. I am asking for a moderate perspective: not a bubble, not to the moon, but somewhere in between. Someone should be able to provide that, succinclty. But I guess that is not popular here on CAPS. Make that all of the US.

PS. long gold, silver, and miners at the time of writing.

PPS Thanks much sinch for providing your point of view. It has taught me much. I just think you take an excellent point to the extreme.

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#15) On November 09, 2010 at 5:45 PM, starbucks4ever (79.83) wrote:


Ok, you have convinced me. When it dips below $100 an ounce, I will buy some. 

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#16) On November 09, 2010 at 6:34 PM, workfor (< 20) wrote:


Don't bother. I like the way you look riding the gold bull just as you are.

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#17) On November 10, 2010 at 11:36 AM, TMFTypeoh (92.64) wrote:

Nice comments by all.

I've said it before and I'll say it again.  Gold could go to $5000.  I understand that theory behind it. I use to have real money in GLD, EXK, SLW.....but I sold too early.

 Why did i sell?

I have more confidence in other investments.  Simple as that.  I have more confidence in AMZN, GOOG, ENOC that i do in gold. I understand the others better, and i can measure them better.  I can't understand what gold does (i have a better idea on silver).

 If you buy the "world is coming to an end" argument, the gold will not save you.  Food will. Guns will. Gold will not. Obviously, im not in this camp.

I have a question for the Gold longs though.  What price will you say "OK, thats is all done from here".  Lets say its 2,000.  Lets also say we get there in a year.  Well first, congrats to you, you've made money.  But, won't ALL the reasons you bought gold in the first place still be true (expanding money supply, inflation)  maybe even more so?  Will you still be holding gold at that point?

Or, will you hold it for 5, 10, 20 years, as it most likely reverts to its old returns of barely beating inflation.

I don't know whats going to happen.  But I DO know that i can't measure gold as easily as i can measure DEO's earnings.  I understand DEO, i don't understand gold (and im convinced few do).

Ill be long DEO, WM & GOOG, you can take the GLD's.  You will beat me (most likely) for a year, maybe 2, maybe 5.  I'm OK with that.

Best of luck to all!


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#18) On November 10, 2010 at 12:01 PM, BillyTG (29.51) wrote:

typeoh, good question.  I need to think out my exit strategy better.  It's too easy to get caught up in the ride and then you wake up one morning to find that your momentum play has dropped 50%!  I've had it happen (which is why I have a bunch of uranium stocks from that bubble a few years ago)!

As far as stocks, I'm planning to step stop loss orders as the prices climb, but really need to think through this better.   Also, I'll look to buy protective puts.  To me, gold is a super global momentum play, and as long as economies and currencies around the world continue to rapidly erode I see absolutely no reason toworry about my exit yet.  I think we have a very long ways to go.

I wish I had some way to value gold the way I can a company like Google, but it's more like "as the economy worsens and monetary/political instability increases, gold will go up." That's my measuring stick and there aren't standardized ways to label the stick.  I base it on news reports, currency devaluations, statements like the World Bank President just made of going to a gold standard, riots in London, etc.  52 week highs, all time highs, EPS, are basically meaningless to me when it comes to gold.

As far as my physical gold and silver, I might never sell!  That is my last-ditch insurance in case dollars and everything in the stock market (including my PM stocks) become worthless.

And I totally agree about the food situation.  Everybody should have plenty of emergency food and water, not just for an economic meltdown, but because of floods, earthquakes, volcanoes, long power outages, heat waves, freezeouts, INFLATION, civil unrest.  Some of these are more likely than others,  but it is downright dumb in my opinion to be 100% dependent on public water and food at the grocery store.  To think that there will NEVER be a break in those food and water sources is naive.

And yeah, there are and always have been more than one way to make a profit.  I hope everyone has good luck, but I don;t want anyone to get thrown under the bus because he was unaware of the incredible events happening in the world that might permanently disfigure our system.

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#19) On November 12, 2010 at 1:00 AM, BillyTG (29.51) wrote:

Zerohedge article, When to Sell Gold

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