Tuesday, June 15, 2010

Motley Fool Users Weigh In On Gold Bubble Question

In an installment of "Ask The Fool," the question dealt with is, has gold entered a bubble? The answers given by the various experts tend to square with their own views on gold: the only people who answered "yes" are those who think gold isn't worth much anyways - with one exception:
Morgan Housel, Fool contributor
Buying gold should make sense as the global economy rots. I just question whether the timing is right, given the massive run-up.

Frankly, the confidence of the gold bulls scares me. They don't think they're onto something; they know they're right, and naysayers are wrong, and stupid you for thinking otherwise. I'm not a mining expert, nor do I follow the gold industry or even particularly care about it. I just know that this behavior more often leads to disappointment than riches.

Here's why I'm wary:
  1. Retrospective back-patting: Gold has essentially gone vertical for 10 years, which bulls somehow find bullish. Really? All it means is you should have bought 10 years ago.
  2. There's also a sense that gold must go higher because it hasn't hit the record highs reached in the early '80s. Count me out. I don't think a level that in hindsight was clearly overvalued and set up a devastating collapse should be strived for.
  3. Celebrity endorsement: Forget Glenn Beck. There's a great commercial where G. Gordon Liddy (of Watergate fame, now apparently a respected gold analyst) says, "Gold is the time-tested currency that goes up, not down!" No further comment needed.

Gold bulls are quick to point out that this is tabloid economics and doesn't matter. Like hell it doesn't. Name an asset that had celebrity endorsement and didn't collapse.

The scarcity fallacy: Gold can't be a bubble, some say, because it's finite. But so is land, and look what happened. No asset is immune to overvaluation, and all assets can become disconnected from reality.

I don't know whether gold is a bubble. I just know that it's giving off the aroma of something that smells like one. Buying a little bit as a disaster hedge might make some sense. Buying a lot in an attempt to make money seems dangerous.

Interestingly, even the confirmed gold skeptics warned against shorting gold.

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