Oh, look -- another bubble

[jducoeur]

[My, I seem talkative today. I can only assume that this is a reaction to feeling like I haven't posted much lately, combined with trying to get my mind off the frustration of bending SQL to my will. Anyway...]

So the slowly-growing news on the money front is that gold is fashionable again. The price is up to fairly silly levels -- around $1000/ounce. Why? Well, everyone is panicking about other places to put their money, and gold always has a certain cachet. And hey -- the price is going up! Why is the price going up? Because everyone is buying gold! Surely that means that it's a great way to make a good return on your money, right? After all, everyone else is doing it!

Basically, this logic is akin to, "Choose Rock. Rock *always* wins." It's another bubble, inflated by the popping of the previous one. For the time being, some people with good timing are going to make a lot of money; in the long run, many people are going to take a bath on it when fundamentals reassert themselves. Caveat emptor...

Comments

[metahacker.livejournal.com]

Funny, I was just talking with learnedax about how it's time to short gold, or sell if you have it...Not that I know anything about commodity futures.

(Bart: "Good ol' rock. Nothing beats rock." Heh.)

[goldsquare.livejournal.com]

Actually, people are also speculating in oil futures.

[cellio]

Yeah, I've been thinking the same thing. If I were holding gold I'd be selling it now. I wonder what the folks buying gold are selling en masse; that might be worth looking at. :-)

(I don't know squat about commodities, really, and still do all my investing via mutual funds, except for the odd individual-stock-purchase-because-of-an-employer thing, though none of that right now.)

[mindways]

Hmm. Not that gold isn't bubblish, but I was under the impression that it wasn't pure speculation - the original force behind its rise was due to the Fed taking risks on inflation in its efforts to keep the economy from tanking, precious metals being one classic inflation hedge.

(Real estate can also be one, which is an interesting factor in the current situation - if inflation does pick up, unadjusted (raw) home prices will "recover" faster, which plays into the whole psychological equation of people not liking to sell for less than they bought for.)

[jducoeur]

Fair point, although this article (which I just dug out for my reply to ckd, so I might as well reuse) points out that the numbers seem even higher than simple inflation hedging would indicate.

Indeed, that article was what set my fingers to typing in the first place, because it contains a worrying observation: that people are fleeing to gold because they perceive it as *safe*. That's one major element in any bubble: the sense that this investment can't lose. When that drives up prices too sharply (as seems to be happening in gold now), the situation becomes dangerous, because the prices are being supported mostly by thin air and mass perceptions -- a classic bubble. And as soon as something pops that bubble even slightly, people rush out of the commodity because they suddenly realize that it *isn't* safe, causing prices to crash.

So on the one hand, I agree that this probably *started* as a typical inflationary hedge. But it looks to me like it's going beyond that this time, with a fair likelihood of bad results for those who invest too heavily in it...

[ckd]

How much of the rise in gold is really a fall in the dollar, though? I haven't looked at the EUR/oz or GBP/oz lately, so I don't have a feel for what the "real" rise in gold has been.

[jducoeur]

I'm sure that I saw something about that. Ah, yes -- here it is. According to that article in the Economist, gold has doubled against both the euro and yen as well. So it's not simply the fall in the dollar causing the price spike, although that's probably contributing...

[calygrey.livejournal.com]

Gold always goes up when inflation goes up. I wouldn't say it's a bubble, so much as a repeating cycle. It'll come down again, and do it all over again next time inflation perks up. Been watching this cycle since I was a child.