Is the Gold Bubble About to Pop?

By Todd Harrison  SEP 07, 2011 10:10 AM

History doesn't always repeat but it often rhymes.

 


The yellow metal debate is pretty fierce.

On one side, you’ve got a viable view that it’s the only true store of value in a world full of fiat currencies. It’s a safe-haven, a place to hide.

On the other, in the words of Warren Buffett, “It has no utility. Anyone watching from Mars would be scratching their head.” He’s got a point; we dig it up, turn around, and bury it in our back yard.

What’s clear is it’s a great trading vehicle and it goes without saying that it’s been a snazzy investment over the last decade. It was also, for lack of a better word, my salvation coming out of a particularly chilly streak in 2003. "Buy energy and metals, short tech and financials and open a taco stand in Costa Rica," I said at the time, sending shivers through the culinary ranks in Central America.

I felt like a hero in the Summer of 2008 when I abandoned the gold camp and shifted my long-term bucket to 100% cash. “All roads lead to deflation,” I said at the time, pointing to the Internet as the most deflationary invention of all-time. That was before Shock & Awe was injected into the veins of the markets, an infusion that shifted the DNA of capitalism.

Stay humble or the market will do it for you, indeed.

Be that as it may, I've updated our Bubble Comparison Chart (weekly, from 1985) and the picture, as they say, speaks 1000 words.


Click to enlarge

When I posited this vibe on Facebook and Twitter, and the feedback was pretty one-sided.

"It really is different this time," said a very smart friend.

“There's no place left to go," chimed Zach Mayo.

"It's the only safe investment in the world!" screamed a self-proclaimed television pundit.

They may be right. If I’ve learned anything in this business, it's that trends tend to last longer and go further than most people expect.

I will simply say this; if you've got some gold as a hedge, please remember that you always want to lose money on your hedges.

If you own it as a pure speculative play, consider yourself officially informed. History doesn't always repeat, as Mark Twain famously said, but it often rhymes.

R.P.

Twitter: @todd_harrison

No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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