Is the Gold Market Headed for a Bubble?

In an article posted late Friday, WSJ’s Brett Arends directs investors attention toward the risks involved in buying gold at current levels, and alludes to the possibility of the precious metal heading for a bubble. Arends also points out that while gold may have captured investors’ imaginations, no one can say what the metal is really worth. Here are a few excerpts from his article:

Investment bubbles usually begin as legitimate bull markets, and I wouldn’t be surprised if gold were next.

Boston is the home of many of the biggest mutual fund companies in America — including Fidelity, Putnam, MFS and Wellington — but one of the busiest places around the financial district right now is J.J. Teaparty, a well-known shop dealing in bullion and rare coins. All day, a steady stream of customers stop in to buy gold and silver bars and coins. A number of local mutual fund managers — “stocks for the long run” notwithstanding — have been seen sneaking off during their lunch hours to do the same.

Gold may be a great bet at these levels. But people should be aware of the risks of buying bullion — either through an exchange-traded fund, or directly.

To say this metal is volatile is an understatement. Since the start of 2008, the price of gold has swung between $1000 and around $700 (it’s currently at $965). This is a safe haven? When the stock market does this, it’s on the front page.

And while U.S. and other Western investors are jumping aboard the golden caravan, many in Asia — who rode it all the way from $260 an ounce — are quietly disembarking. The World Gold Council, an industry body, reports that Asian investors were actually net sellers during the first quarter, while westerners bought heavily and sent prices soaring.

Rarely does anyone discuss the biggest problem with gold — no one actually knows what this metal is really worth. After all, it generates no income. All the gains come from capital appreciation. And that, of course, is a gamble. [The WSJ]

The question about gold’s direction very much depends on the government policies and central banks’ action. While it’s true that gold over the long term has held its value far better than the dollar ; its our view the precious metal’s future will be strictly defined by debts, deficits, and the greenback’s policy.

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4 Comments on Is the Gold Market Headed for a Bubble?

  1. Thank you for restating the government propaganda in its quest to suppress the only real money throughout the ages. Pathetic….

  2. The article’s premise in no way implies that gold won’t go higher nor it intends to restate the gov’s propaganda (frankly speaking, we don’t give a rats ass about the latter). When we say gold’s direction very much depends on the government policies and central banks’ action, we are simply insinuating the obvious. Supply and demand ultimately will determine the price of gold in the long run, that’s already a well-known market dynamic. However, in the shorter-term gold will remain inversely restricted to the greenback. Why? Because, first , and as recent data suggest, the Fed currently has gained complete control over the value of the greenback by adjusting and micro-managing it on a day-to-day basis. If the central banks wants the dollar to pip higher, it can reduce the number of sequestered dollars. If they want it to fall, they can just ease up, releasing dollars into the financial markets. The reality is that it’s all about the money supply spigot when to allow the dollar to fall and the stock market to reflate or vice-versa. It sure is a screwed up dynamic and it has nothing to do with market fundamentals ; but being implemented nonetheless.

  3. I don’t think gold is anywhere near its peak. When people talk about its high price levels, they never seem to remember that when its previous all time high was set in 1980 dollars were worth a lot more than they are now. There is still a long way to go before gold hits its all-time high in real terms.

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