Bubble Call From Down Under

The fellow that made it, Macquarie Bank interest-rate strategist Rory Robertson, says that gold is in a bubble because it's supposed to be an inflation hedge but inflation's nowhere in sight. More to the point, the main reason given for going up is, it's gone up.

Robertson admits one has to be careful about bagging gold bugs because for a decade they have been right - gold has been a standout performer

''Naturally, this long, steep uptrend in price has been attracting new investors, with the growing gold bandwagon driving further increases in the price. While some investors really do fear runaway inflation just around the corner and others genuinely fear a collapse in the fiat money system, my guess is that the bulk of investors have been attracted primarily by the extraordinary upward momentum in its price.

''Right now, the idea that gold above US$1200 an ounce might be a good investment mainly reflects the early near-quintupling in price.''

The commentator linked to above adds to Robertson's reasoning with these two points: first of all, gold shooting up is making marginal mines profitable again, inducing further supply; secondly, there's a self-fulfilling-prophecy kind of infinite regress in play. To wit, gold going up shows the financial system is close to collapsing; the financial system being close to collapsing justifies a higher gold price - and around it goes.


Unlike some others, Robertson isn't smarting over a missed call. He actually won a bet about Australian property prices with another fellow recently. In addition, he expresses caution that a snarker wouldn't:

''It is the very nature of bubbles that drives prices well beyond what most observers see as reasonable. Accordingly, the price of gold over time could jump to multiples of its current elevated price, before reversing,''

Ironically, that statement jibes with what some excited gold bulls have been saying. The difference is that Robertson thinks such a rise will prove to be unsustainable.

The fact that he's cautious is good reason to take his forecast seriously - it's a sign that he knows bubbles.

On the other hand, just because he's serious doesn't make him right. Shae Smith essays a rebuttal here. Smith's main point is that there's real financial turmoil out there, and it looks like it's going to spread further.