November 16, 2010, 5:00 am

Why Are You So Interested In Gold?

by: The Financial Blogger    Category: Investment, Market and Risk
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I know that people usually enjoy investing as others do. In general, people like following what other people do. But this is how bubbles are created. And “people” don’t seem to learn from their mistakes, this has been repeated over and over again. While the same “people” are very concerned about a housing bubble in Canada, they don’t mind as much about the craziness about gold investment. So maybe I am stupid, but I don’t think that investing massively in gold is a good thing. What if there is a gold bubble?

Why gold is going up so fast?

The price of Gold is increasing so fast for many reasons, to make it simple, here are some of the majors reasons:

– People are afraid by the HUGE debt in the USA and therefore prefer gold to the US dollar

– China has too many US dollars, so they hedge their position by purchasing gold

– Same thing in India, they seem to like gold too

The price of gold is going up while the interest rates of CDs and bonds are going down

– For a weird reason (weird because gold has similar volatility as the stock market), people trust the value of gold

– Then, the smart guys on Wall Street are speculating on the price of gold

Buy why gold would be different than other bubbles?

I don’t get it. In order to have a bubble you need;

– something going up pretty fast

– something going up pretty fast for no sound reason

– something going up pretty fast because mister and mrs everybody is buying it

– something going up pretty fast because it is pushed by speculators

Then… is it possible to have a gold bubble? I am not the type of guy to scream from the rooftop that the end of the world is near. I am actually more the type of guy that wants to make money while people are running the other way. However, I think that we have several ingredients that were put together to make a great gold bubble soup. And I can smell it from my kitchen!

Oil anyone?

Just before the crash of 2008, we read study after study written by the most prolific economists and PhDs telling us how the price of oil would skyrocket due to its rarity. It was common to cross mister and mrs everybody telling you that they had bought an oil company shares or an oil related ETFs because the price of the barrel will soon hit $200…. 2 years later, I’m still waiting… and most of the “people” lost a huge load of money (because they probably sold when the barrel hit $35 back in December 2008)…

Why gold would be different?

This is the caveat with all bubbles; this time, it is different. Let me laugh and spill coffee on my laptop for a moment… okay, I’m done. Really?  Gold is different? Can someone tell me ‘cause I don’t get it ;-).

If you want to read more about gold, Intelligent Speculator has a very interesting 2 parts series on the price of gold:

Why gold could go up

Why gold could go down

What is your take? Gold to go up or burst the bubble?

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I’m not that interested in gold as an investment so I’ve never tried to analyze it (of course you can’t really do a fundamental analysis on gold itself since it has no income). I wouldn’t know enough to invest in it or short it, but when an asset joins the “dow 36000” and “oil 1000” club of comical projections it’s best to sit back and watch the show.

I just noticed exactly that type of sentiment this weekend in the Financial Post: Ironically the article unintentionally explains why the real gains on gold are actually pretty boring if you look back to the last peak. This may well be a sign of the end!

Apparently 2000 was in fact a good time to invest in gold – I wonder what everyone was saying then?

Usually it’s easy to spot a bubble when EVRYONE is telling you how easy it is to make money in a particular asset class. It happened with oil and US real estate a few years ago, and it will happen with gold too.

The market eventually tends to move in the opposite direction of conventional wisdom. Perhaps that is why the bottom hasn’t fallen out of the Canadian real estate market. Everyone is expecting it to, so maybe it won’t happen. At least people in Canada aren’t talking about flipping houses for profit right now, which was pretty popular a few years back.

What makes me scratch the head is the “store of value notion”

People buy gold based on this notion and believe that paper money i.e the US$ is losing value.

But the gold is priced in US$, they will exchange their money and if price of gold, NOT value of gold, rises, they will get more debased currency. So basically Gold Bugs are Oscar Wilde cynics, know the price of gold but not its value!!

I was also thinking of DOW 36000 moment when last weekend globe and mail featured gold in a non-business section. Contrarian heed this!!

Any asset can enter a bubble, including gold. I think a lot of people are capitalizing on this now to make some smart money before the dumb money comes rushing in. Regardless, gold’s been money for thousands of years…. and maybe it will regain some respect at the table, again. We are, after all, comparing where it is today only to when it was extremely disrespected by everyone in the 1990s and early 2000s. Not every rise is a bubble.

There’s a lot of interest in gold in Western countries these days, no doubt. Is it in a bubble or manic phase? Hard to say. On one hand, most folks in the US don’t give it much thought. On the other, more and more mentions of precious metals in the popular mainstream media. I posted recently that even Jim “Mad Money” Cramer is mentioning gold in his show (and making some silly recommendations). Personally, I’m an agnostic on whether gold will go for a moon shot or go down. One way to look at it is that many new gold mining projects are being scoped out with feasibility gold prices of $900/oz and $1,000/oz. So that could be seen as a “floor” price of sorts. Or not.

I guess they were saying it was the worst investment possible 😉 hahaha!

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