So what happened when gold went from $850 to $250?
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.
The "$850 gold" episode is immutably linked the the "$50 silver" episode which creamed the Hunt Bros. In that episode, the Hunts were leveraged to the hilt (big mistake) and the COMEX changed the margin requirements...which, by the way, the COMEX just did on silver a few days ago. The change in margin req'mnets by the COMEX forced the Hunts to liquidate large amounts of silver and a price waterfall ensued. All I am really pointing out is that these things that happened "long ago" are very hazy in peoples' memories and there's a lot of shall we say "folk tales" surrounding them.
I've been pounding the table on silver since sub-$6 and it's rare I don't get a "Hunt Bros" comment. But really, it's fundamentally based. Silver can NOT be pulled out of the ground, environmentally permitted, refined, molded into ingots, checked into COMEX warehouses, etc etc for $6. Can't be done. $6 is flat out intrisically less money than it costs to get the stupid stuff to where someone can see it and hold it...or use it...or hoard it. I mean, that's 2 stinking lattes, or whatever. Same story w/$260 gold. It would be as if I was selling a house that could be rented for 2x the (fully amortized, not fantasy) mortgage payment or would cost 2x to re-create. It is a fundamental pricing imbalance awaiting only an awakening market to extinguish and correct. Now....can all that stuff be done (wrt pulling Ag/Au out of the ground) at Ag = $14.6 and Au = $640. I don't know. I don't think it's grossly, horribly overpriced.
NOW, however, there is clearly an entirely new mechanism taking over the precious metals markets, and it appears to be adding to whatever has driven the prices up to their already high points. It has elements of being a frenzy, for sure. But geez, how much money has been created in the poast few years in real estate...? Nobody complained when their houses tripled in value.
I have a good summary of the Hunt story, but I don't have a link, only a three page piece of blather...which is nevertheless worth reading. I will try to fetch the link & post here.
Currencies were inflating.
Gold is a hedge, not an investment. It's a storehouse of value that has remained relatively consistent. If currencies are looking weak, you take a 15% position or so to offset the decline. When the dollar starts to look strong, you sell your gold and go back to the currencies.