Are we in a Gold Bubble

19 April 2006 | Jim Verdolini

[Jim Verdolini]

Are we in a Bullion Bubble? Gold and silver are rocketing to new highs. Look at the trend:

Monday Gold was over $604 and silver $13.33. By the end of the day Gold was $618. Tuesday it was Gold $620 and Silver $13.55. This Morning Gold $624.90 and Silver $14.16. Right now Gold is $632.70 and Silver $14.54!

I have read that there are two major things, in addition to oil prices, causing the rise. For Gold it has to do with a rumor that China plans to convert a small bit of their dollar reserves to Gold. For silver, there is a rumor that the metal will be traded differently and more vigorously. If China was to convert only 3% of their dollar reserves to gold, that would be the entire worlds production for a year!

I bought my wife a small gold crucifix last month. The chain supporting it was so frail that it broke in less than 2 weeks. I replaced it with a more serious chain and the store gave me a $20 credit on the flimsy old chain that weighs about nothing.

[Jim Verdolini]

The problem, at least for me, is the price has reached a point where I cannot afford my normal monthly Eagle buy. I do not own enough to make a real killing and want to hold what I do have for another 20 years, then take one heck of a vacation. I still want to buy but not at $630....I will have to buy silver, though I do not believe silver has as much room for growth.

[Attention Surplus Disorder]

Think of a zillion other people in your exact position, and IMO you'll see that silver is far more undervalued than gold.

[bjs1779]

There are mini contracts available.

.

Contract Name	Symbol	Months	Tick Size	Trading Unit	Min Fluc	Init Margin	Maint Margin
Aluminum	AL	All 12	$0.0005 per pound	44,000 pounds of aluminum	(.05¢) per pound	$1,500	$1,500
Gold	GC	All 12	$.10/oz. = $10.00	100 troy ounces	10 pts=$10	$2,362	$1,750
Copper High Grade	HG	All 12	0.05 ¢/lb. = $12.50	25,000 pounds	5 pts=$12.50	$3,038	$2,250
Palladium	PA	All 12	$0.05 (5 cents) per troy ounce ($5 per contract)	100 troy ounces	5 pts=$5	$2,700	$2,000
Platinum	PL	All 12	$0.10 (10 cents) per troy ounce, $5 per contract	50 troy ounces	10 pts=$5	$2,700	$2,000
Silver	SI	All 12	$.001/oz. = $5.00	5,000 troy ounces	50 pts=$25	$3,038	$2,250
NY Mini Gold	YG	All 12	10 cent/fine troy oz	33.2 fine troy oz.	10 cent/fine troy oz	$338	$250
NY Mini Silver	YI	All 12	$.001/troy oz.	1,000 troy ounces.	$.001/troy oz.	$459	$340
100 oz Gold Futures	ZG	All 12	10 cent/fine troy oz	100 fine troy ounces	10 cent/fine troy oz	$1,822	$1,350
5,000 oz Silver	ZI	All 12	$.001 per troy ounce	5,000 fine troy ounces	$.001 per troy ounce	$1,822	$1,350

[ghostrider]

I understand your hesitation. Although I think the dollar is becoming worthless, I quit buying my fund when gold was at $400. I am not yet ready to sell, but I am watching things closely. I can't eat gold, but in a sick world like this, I may need it to buy bread. My college professor told us to use gold as insurance. Buy enough of it to cover things if a German, Russian or Argentine style devaluation occurs. Hope that it doesn't happen and be happy if you take a loss because times were good.

[Labyrinthos]

But it's always a comfort to have a little metal in your stash as an insurance bet.

An insurance bet against what?

[William Terrell]

LOL. The AM dial is inundated with such horse manure. These are guys that bought gold when it was $311/oz. Now they're ready to sell at a huge profit, but who will buy without assurance it will go (higher, higher HIGHER!)?

I take such "advice" with an entire saltlick.

[pgyanke]

1971 is a convenient year. 1980 is an inconvenient year. Your 80 oz that are now worth approx $51K were worth approx $64K then. Run that comparison to inflation over the last 26 years...

[oblomov]

Gold is insurance against a loss of faith in official authority and the money backed up by it...

[Labyrinthos]

OK. But let's assume that gold is riding a bubble that is about to burst like it has many, many times in the past. How does gold provide insurance against anythng if, as in 1981, for example, the price peaks at around $800 an oz. and then heads into a steep decline where it stays for the next 22 years or so?

[Jim Verdolini]

"An insurance bet against what?"

Are there any shortfalls in potential disasters? The housing bubble, bird flu, Iran, the deficit, China not to mention 50% of the country that is clueless on basic economics and the other party, the one in power, clueless about spending restraint?

Lots of potential bad stuff out there. What if the tax and spend democrats take over. If you think the republicans in congress are out of control wild spenders, imagine democrats who both spend like holywood trophy wives and disarm us in the face of terror.

[Labyrinthos]

But how exactly does gold act as an insurance policy? In other words, how does it pay-off if something really bad happens?

[Attention Surplus Disorder]

Without attempting to start any kind of argument, I'd just like to point out about four assumptions inherent in your post:

1: Folks who bot gold at $311. should be BUYING MORE, not selling, because it means they can withstand a terrific price hit. The best traders average UP. If you yourself can't imagine who'd buy gold here, that doesn't mean such people don't exist.

2: When you say "who will buy" do you think that, for example, you can get into the heads of Iranians who could quite legitimately fear a US attack? Those Iranians who are in a position to have doubled their oils revs are in essence buying gold at $315 right now. And there's plenty more buying power coming out of the ground every day. How about the Chinese & Indians who have thousand-plus year histories of revering gold? We've put gobs of money in the hands of the Chinese in recent years. Dumb of them to put 5%-10% in gold?

3: Whether or not the AM dial is loaded with gold ads is just a function of who thinks they can make money on what. I think folks are idiots for buying Britney Spears CDs, but we both know that two days sales' of Britney's latest is probably more money than I'll see in my lifetime. The average investor is nowhere near the gold market. Folks are generally entirely unaware of it. That will change over time. There is enormous room for more "suckers" to pile into the market.

4: With the doubling++ of real estate in almost every civilized nation in the past few years, my view is that folks could be buying gold, instead of ANOTHER big screen or ANOTHER condo to try to flip and have significantly less downside than with either of those options.

Gold has plenty of room to run. IMHO.

[Jim Verdolini]

"OK. But let's assume that gold is riding a bubble that is about to burst like it has many, many times in the past. How does gold provide insurance against anythng if, as in 1981, for example, the price peaks at around $800 an oz. and then heads into a steep decline where it stays for the next 22 years or so?"

If you bought at $800 you were screwed. If you bought at $200, you were a visionary. In every bubble ther are winners, the unlucky and idiots.

[Jim Verdolini]

"But how exactly does gold act as an insurance policy? In other words, how does it pay-off if something really bad happens?"

It depends on how bad things are. If we simply fall into a real depression, or inflation, as dollars by less and less or become scarce, then the value of gold, in those dollars goes way up. Say you are on a fixed or semi fixed retirement income and suddenly inflation double digits again while your income goes up 1 or 2% a year. If you are sitting on gold or silver, you fix the difference. If things go really south and people stop taking paper money, then barter and hard money become vastly more valuable. One might not be able to buy gas for paper or might need so much of it that the paper becomes pretty worthless. In those cases your 2006 silver dollar might buy you a tank of gas when $100,000 in paper money might not.

Put another way...folk will always take gold and silver. Paper of sometimes worthless.

[William Terrell]

I'm not very sure that international gold interests listen to American AM. I'm sure that are some that will buy gold at the current price. I don't think they do it because of radio advertisement. I don't think we're talking the same markets, here, but I accept your exceptions.

[simon says what]

OK. But let's assume that gold is riding a bubble that is about to burst like it has many, many times in the past.

Other than 1981, what other times are you referring to Gold being in a bubble in the past ?

[Toddsterpatriot]

Gold's value always stays about the same - it's the currencies that are deflating.

So what happened when gold went from $850 to $250?

[Toddsterpatriot]

This country has to get off it's lazy arse and start creating items of value.

That's right. We don't make nothin' no more!!

Only $3 trillion last year!!

[Attention Surplus Disorder]

That was for sure an odd occurrence, and of course "painful" would be a more appropriate term for the last ones in. Interest rates went to 18% and the dollar became much more desirable. The fabled "$850 gold" episode was a very brief period. In retrospect, of course, these things are easier to encapsulate. $850 was a bubble high, from which gold tumbled preciptiously. See http://kitco.com/charts/historicalgold.html

Still. Is there anything really different from other frenzies? Surely the last ones into the NASDAQ bubble got hurt and are still hurting. Surely the last ones to try to flip $650K 1 bedroom condos are gonna be clocked. Capitalism at it's best? Or worst? One point of pespective, however, is that gold from the 1980 tumble to Y2K was in a very depressed, 20-year bear market. That's why many gold bugs think gold has a long ways to go. I count myself among them.

[american spirit]

I like the way you think!