Is there a Gold Bubble and When Will It Collapse?
The Fascination with Gold
This page will give you the facts from both sides of the debate on whether there is a Gold asset bubble and when will the gold price become unsustainable.
Gold is a curious thing because it is not consume like its precious metal cousin silver. It is considered as an asset by some while others like Warren Buffett says it does not productive work but just use up precious man effort to mine it and guard.
Some like George Soros says there is a bubble forming in gold but his fund is still heavily vested in it probably because he knows that the last legs of a bubble can be extremely profitable.
Read on to judge for yourself if gold is next bubble ready to pop and when are gold prices likely to collapse.
Is Gold Really An Asset?
Gold is a singularly unique thing. Maybe it is this uniqueness that attracts us to it and also confuses so many people.
It is a precious metal and like silver it has some industrial use. But unlike silver it is used as a store of value and used to be used as a form of guarantee for fiat paper money.
Very little of gold is actually used up in industrial processes so nearly all of the gold that have been mined over the years is still remains above ground in one form or another. This make the overall supply of available gold above ground nearly constant with slight increases annually.
Unlike most commodities which are driven by industrial and/ or consumer demand, a large part of gold demand is for investment and speculative needs which can be high liquid and predominantly driven by market sentiments.
The thing is gold might not be an asset at all. An asset must be able to create real additional value over time. Gold on the other hand does not produce anything. In fact it actually cost money to retain ownership of it over time in the form of gold deposit costs or gold ETF management fees.
- How an Asset bubble forms ?
Here's a insightful simplification of how an asset can form in a very small country with 3 citizens and 2 one dollar coins in circulation, and a piece of land that is the asset.
- Economic bubble - Wikipedia, the free encyclopedia
Here's what Wikipedia says about an economic bubble, also known as a market or price bubble.
There is one mathematical model that I know of that suggest that gold is in its last stages of a bubble with a prediction of a large price collapse something within April to Jun 2011, from a price high of USD$1,500 to $1700.
However its important to note it is questionable if mathematical models can predict social economic events llike an asset market. In any case the authors does suggest that significant interventions from governments can also change the underlying assumption making the predictions invalid.
My greatest takeaway from this research is that the possibility does exist a price collapse citing the oil bubble collapse of the 1980s. As investors we have to factor in this significant risk of a large price collapse and structure our portfolio appropriately and with a clear contingency exit strategy.
More Resources for the Gold Bubble Debate
- eScholarship: Log-Periodic Oscillation Analysis Forecasts the Burst of the Gold Bubble in April Jun
A mathematical model suggesting the gold bubble might burst with increasing probability leading up to 14 Jun 2011.
- Gold Bubble To Burst When Rates Rise: Wealth Manager - CNBC
Gold is currently in a bubble and investors need to apply some common sense when trading it as it will likely fall on interest rate tightening, according to Yogi Dewan, the Founder and CEO of Hassium Asset Management.
- Soros Gold Bubble at $1,384 as Miners Push Buttons - Bloomberg
James Burton didnt have a penny invested in gold of the $142.8 billion he managed as chief executive officer of the California Public Employees Retirement System in 2002. Why would he? The metal had been in a bear market for two decades.
- 11 Signs That Gold Is In A Bubble That Is Going To Burst
Here's 11 reasons to ignore the hype and reconsider your gold investment.
- Gold as an investment - Wikipedia, the free encyclopedia
Here's an interesting excerpt on what wikipedia says about "Gold as an investment". ... "the Askar Akayev's research group has allowed them to forecast a collapse in gold prices in April June 2011." ...