Bill Fleckensten Debunks End-Of-Bubble Forecasts

He makes some good points in his article, "How much longer can gold rise?" Mr. Fleckenstein's tongue-in-cheek five-point list of what the gold market'll be like when the bubble tops is more truthful than it may sound.

For the long-gold trade to really become too crowded, certain events will need to occur:

1. Goldman Sachs (GS, news, msgs) will have had "bus tours" to a bunch of mines, like the tours it and other companies have arranged for different industries, particularly technology.


2. The public will have to be involved in a major way, and we'll see ads on Bubblevision encouraging people to buy gold instead of prodding them to sell their jewelry, as is the case these days.


3. Banks will need to find a way to put money into gold -- because no modern mania has ever ended without the banks finding a way to lose money in it.


4. We will most likely need to see a frenzy of mergers and acquisitions, and a leveraged buyout or two.


5. Last, BusinessWeek will have to put gold on the cover, telling us how it's the wave of the future, or some variation of that theme.

He's right, particularly about the media exposure. Also, gold will be featured on the regular MSM [SRM for some]. Back in 1981, I bought a 1/10 oz. gold Krugerrand with some of my paper-route money because gold had been mentioned in the regular Canadian media. The line-up was the longest I had seen for a bank or trust company.

So, I can add a sixth item: huge line-ups at gold retailers, particularly banks and trust companies that sell gold, with at least one myopic kid waiting to buy. Those line-ups are noticeable enough to make the non-business media think gold is newsworthy.

[Note: I got this item courtesy of the Free Republic. The post thread's here, with a comment I left. It's #13.]

Thoughtful Piece Discussing The Gold-Bubble Question

It's by Robert Blumen, and it's been webbed over at LewRockwell.com. After pointing out that the same people who are saying "gold bubble" missed the ones that popped last year, he says that it's a matter of one's model. Since a bubble means that an asset is way above its fair value, the determination of said value is crucial.

He ends, however, with this call: "If I am correct, then the next phase of monetary history would almost certainly involve an informal or formal recognition of gold as a monetary reserve asset by central banks. Gold would then be revalued at a much higher level of purchasing power relative to recent history."

My own "model" is based upon market psychology, not fundamental value. As Mr. Blumen himself pointed out, it may be impossible to determine a proper fundamental value for gold because it's not used as money anymore. The main driver for its fundamental value is demand, which is unmeasurable except for past buys. There's no income derived from gold that can be used as a gauge.

Market psychology is more pragmatic: an asset or asset class is in a bubble because it acts like it's in a bubble. Central to my own model is a New-Era story making gold look undervalued despite its spectacular rise. In gold's case the hoped-for "New Era" features the U.S. dollar being dethroned as the world's reserve currency and being replaced (at least partially) by gold at the central-bank level. To me, it counts as a New Era story because the greenback is too ensconced as a reserve currency, and the United States itself is too ensconced as the world's only superpower and major market.

I should also make clear that I believe that gold's at the beginning of a bubble, not the end of one. The New-Era story hasn't kicked in, and gold's only beginning to move into the mainstream. (When an normally alternate investment moves into the mainstream, like gold did in the late 1970s, it's a good sign that a bubble's forming. Alternate investments typically stay alternate.) My own reasoning is explained here.