Gold – setting up for a crash?

Crystaline Gold

Image via Wikipedia

Why not? In fact, anything remains possible in financial markets.

Whether gold is resembling a mania or bubble is subjective. Heck, gold could probably double and double again! In the tech stock mania of 1999, We witnessed certain stocks rise 10 fold in under 2 years while gold has only tripled in 5 years. Finance historians have said that one requisite of a mania is to have the asset made easily available to the masses. Well, I haven’t researched whether this is the case today, but I have read about gold dispensing ATM’s have appeared in Europe, North America and the Middle East.

I find it quite comical that when gold rises, zealots dismiss any criticism of their beloved gold by wheeling out their citation of it being a store of value. Who decided that gold is the store of value?

What about silver, tin, sugar or coconut oil as a”store of value”? They too have also tripled in price in the past 5 years?

Between 1981 and 2005, we saw a period of massive asset price inflation and gold traded between $220 and $520 an ounce. It was a very poor store of value for that 24 year period.

I think it’s important to question if gold has become a financial asset that is now a speculative instrument.

I’d also like to challenge the growing movement that gold is an alternative currency. I would like readers to shave a sliver of gold from their hoarded ingots and pay for a coffee, restaurant bill or their car insurance premium! Seriously – when you next sell your family home, don’t put a dollar figure on it – just request that the selling price is 450 ounces of gold. Let’s see how your property conveyancer settles that against the bank’s mortgage?

However, I do marvel at predictions of various targets set by pundits. I ask myself how do they come to such a figure?

As gold doesn’t produce cash flow or have an operating profit, I wonder how these “analyst’s” can value it’s worth? Gold bugs often rebut this statement by talking about Indian jewellery demand, waning mine development and slowing supply.

I’m just not convinced.

If gold is not coming close to a crash, a notable correction would be a healthy. I have posed the question to various folk that gold could halve and they’re answer is overwhelmingly – “It’s not possible”.

Amongst the stories that I now hear and read include Inexperienced investors exhibiting interest in buying gold, Bar room stories of  how “they” bought gold years ago, Affirmations that gold will be the only thing that will keep its value when the world ends and the front page of the business section of a national newspaper features a story claiming it was easy for the featured executive to have made money by investing in gold.

To boot, new gold ETF’s are being created almost weekly, the commodity futures regulators are increasing margins to kerb speculation and gold is within $30 of (the more precious) the price of platinum. The spread between these two metals has averaged ~ $400 for the past 30 years.

Recent moves in the U.S. bond market are telling me that “hard asset” deflation should be investors bigger concern, rather than inflation. Albeit, I believe we will see continued food and energy price inflation. More on this topic is a forthcoming post.

Finally, I believe that there is no such thing as a forced buyer, yet with gold, I think many are acting either in a manner that they feel “forced” or worse still; that they are about to miss-out.

One Response to Gold – setting up for a crash?

  1. Leigh says:

    Great call, Rob. A “healthy correction” in gold prices over the past couple of days. Perhaps just a start.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: