Steadfast FinancesTraders Know it's a Gold Bubble, Why Don't You?

Traders Know it’s a Gold Bubble, Why Don’t You?

Filed in Commodities , Investing 101 , Investor Psychology 41 comments

This is how seasoned commodity traders view the current gold bubble. Whoops! I mean gold rush.

Experienced traders know very well that the gold market is teeming with multibillion dollar hedge funds and professional speculators, which means they are after one thing… fast money!

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Granted, the popularity of investing in gold is also being fed by nations topping off their gold coffers, Forex traders shorting the U.S. Dollar, and even the possibility the U.S. Dollar will no longer be the world’s reserve currency. These are all highly valid reasons for gold to spike higher. But this far, this fast?

One has to remember that the story fueling the oil bubble (e.g. the BRIC emerging markets) was also a highly plausible argument, until the speculators dropped it like a bad habit. They even began shorting oil and the oil related equities they pumped up months before.

But still, the warning signs of an investment bubble are everywhere:

  • Magazine covers, newspapers, blogs, and mainstream media constantly say The Dollar Is Dead.
  • CNBC commercials trying to convince you to own gold over cash (These ads aren’t always on the level considering CNBC ran a few loan modification scams.)
  • Late night infomercials giving you the hard sell on why you should be buying gold or silver coins.
  • The sudden popularity of discount brokers offering Forex trading.
  • The water cooler talk at work revolves around the Gold ETF (NYSE: GLD).

This is why that I continue to state that gold above the $1000 mark is a trade… not an investment!

As my Grandfather used to say: when everyone has jumped aboard the bandwagon, the wagon breaks down. (Apparently, that’s a fairly common adage considering Mark Haines says something similar in the CNBC segment.)

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Posted by CJ   @   10 November 2009 41 comments
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Nov 10, 2009
2:30 pm

But is it still a bubble if it’s the only trade in town? That would mean more of everyone is in, not just speculators. Conversely, it’s not a bubble until it “pops” – so if all these reasons keep piling on and on, the “bubble” just has that much more room to grow.

I don’t deny there’s a lot of speculators and hedge funds in the game – but those guys/gals are going to go somewhere, no matter what. Seems that as long as there is continued QE in the US, the gold bubble has continued strength.

Nov 10, 2009
2:49 pm
#2 Matt SF :

Of course it’s still a bubble. :)

That’s what makes it so dangerous. The bigger the bubble gets, the greater the damage will be.

The same mentality of “the bubble has continued strength” is what caused the U.S. real estate bubble to feed upon itself for so long. There is little worry if you plan on selling at the top, or as soon as the chart begins to roll over.

That’s why I say gold has become a trade, not an investment.

I don’t think anywhere near the amount of people will get burned by gold as by the real estate bubble, but still, it’s the same old pump and dump mentality that Wall Street is selling to Main Street that irks me.

It’s still a great trade, but no one ever went broke taking profits.

Nov 10, 2009
5:17 pm
#3 Gary :

As a rule, unless you want to lose money, never rely upon any of the information/propaganda that airs on CNBC. The main question seems to be whether or not gold will continue to move higher. I think it will over the medium to long-term, with probable sharp pullbacks, until the Fed begins raising interest rates or until Congress takes serious action to control the deficit. When I look at a long-term chart, it doesn’t appear that gold has risen too far too fast, with the exception of the spike over last few days. It could be a bubble, but I don’t think it is yet. IMO, gold and gold stocks are no more dangerous than any other financial asset. Keep one trigger on the sell button, but in the meantime, enjoy the ride. If gold becomes a bubble, and I hope that it does, at least it won’t hurt the majority of the people or the overall economy. I can’t think of a better asset to absorb excess liquidity.

Nov 10, 2009
5:23 pm

The beauty is that the economy can recover strongly, as well as the US dollar, and gold. Strange, but true.

Inflation adjusted, Gold hit $1,800 back in the 80′s. Why can’t we go up 80% from here given monetary massive expansion?

Nov 11, 2009
11:01 pm
#5 Abigail :

Thank you! For months now, I’ve been reading about everyone flocking to gold, wondering when everyone is going to realize it, too, is a bubble!

Of course, the problem with every bubble is that you can’t tell when it’s hit the top. If people thought like me, they would have stopped buying gold MONTHS ago, which means they would have missed out on the opportunity to make tons of money. (I’m far too conservative when it comes to investing… should I ever have the money to invest.) Because a bubble continues to grow right up until — well — it doesn’t… People can point to the increase in prices as proof that it’s NOT a bubble. No, see? It’s a real investment! I am making money.

And they do, so long as they get out in a timely fashion. But plenty of people hang in there, wanting to wring every last penny out of the investment. So when the bubble pops, they are out of luck. And the rest of us have to hear about how unforeseeable it all was. It’s exhausting and aggravating as hell.

Nov 11, 2009
11:47 pm
#6 Matt SF :

@ Gary,

I agree that you have to be somewhat jaded about taking advice from CNBC. When I do, I’d rather take it from traders who identify themselves as traders (so you know you’re dealing with a shark), instead of the money managers who want to hype their 3 largest holdings. I’m sure that some of the folks that come on CNBC quickly liquidate some (or all) of their positions after appearing on air considering the temptation of selling into the daytrader spikes.

I also agree that gold will likely go higher. The gold inflation adjusted charts I’ve seen require a high of $2350 to equal what it was in the 1980s when that gold popped, so I wouldn’t be surprised for the technical traders to bid it up to those levels.

If I were going to play gold, I would prefer to play in the gold miners since they’ve liquidated their short term hedges, and try to find one that was well diversified across several metals. Something like a Freeport McMoran (FCX), which is a gold, copper, and molybdenum play.

Nov 11, 2009
11:52 pm
#7 Matt SF :

@ FS,

Absolutely, being the patient type, I’d almost rather gather up some of the US Dollar holding instead of gold at this point.

I’m sitting on the sidelines so I don’t have a horse in this race yet, but as we saw in March 2009 after the stock market crash, the best time to buy is when everyone is preaching doom & gloom! ; )

Nov 12, 2009
12:04 am
#8 Matt SF :

@ Abigail,

Thanks for commenting. Your reasoning is spot on from the gold bear standpoint. I see and feel the same things when I see friends and everyone else clammoring over gold just because everyone else is doing it. Behavioral economics is funny that way… we all see something, and everyone else thinks “Hey, I better get some too!”

That’s why I say gold above $1000 a trade, not an investment. If you’re going to jump in at these levels, you should be prepared to quickly sell it once the gold bubble bursts.

What is even more astounding to me are those folks who claim that gold should be a part of every diversified portfolio probably aren’t selling into the spike in gold prices. Basic portfolio re-balancing states you should take profits in those investments that increased in value, and buy more of those things that declined in value. Let’s hope their using some discipline, and not their water cooler peer pressure hunches.

Nov 12, 2009
4:07 am

i think that the big dogs like the multi-billion dollar hedge funds and private equity funds will be the winners in this supposed bubble. The individual conservative investor will lose. The institutional investors have more brainpower and computer power working for them. I think i will start a hedge fund in future

Nov 12, 2009
10:02 am
#10 Matt SF :

Absolutely, the big dogs are the ones who continually bid it up but will dump it in a heartbeat once the trade is over.

Thanks for commenting.

Nov 12, 2009
5:15 pm
#11 Andrew Bachagalupe :

Matt – you are flat wrong. Try if you will, to compare the degree to which real estate dominated the national discussion from 2001 to 2006, to the gold “bubble”. One (RE) saw widespread participation across all socioeconomic groups, all ethnicities, and all income groups. Now think about the “bubble” you claim to be seeing for gold. Do you go to dinner parties and see couples bragging about their latest gold purchases? Do you see widespread ownership of gold in 401(k) plans? In brokerage accounts?

I have done much work on this topic as an investigative financial journalist. I have spoken with over a dozen Schwab branch managers and roughly 2 dozen Fidelity branch managers in order to determine what % of assets their avg customer has in gold-related securities. What I have found is that gold is STILL significantly under-owned by the public.

One day, that will no longer be the case. But as for the existence of a gold bubble today? Matt – we’re just seeing the very start of broad public participation….


Nov 12, 2009
5:24 pm
#12 Matt SF :

@ Andrew,

That’s what makes a market… one guy saying sell, another guy saying buy! As for me, I’m sitting on the sidelines.

But yes, I have gone to dinner parties with multiple couples saying they’ve bought gold in the last 12 months. The common denominator was “everyone else is buying gold“, not the fundamental reason of “the US Dollar is dead“.

I also know a few who have rebalanced their portfolios, and others who are waiting for gold to hit $2000.

Time will tell. Thanks for commenting!

Nov 12, 2009
7:50 pm
#13 Andrew Bachagalupe :

Matt – Think back to March 2000 and Fall of 2005. THOSE, were bubbles. The hapless U.S. investor who chases trends and always seems to have the ability to position themselves in the WRONG investment vehicle at precisely the WRONG point in time, is nowhere near long enough gold for this to be a bubble.

Like I said, gold will be in a bubble at some point and when that point in time comes, it will be quite obvious. November of 2009/Gold? Short term top with some sort of pullback to slightly above or below $1,000? Absolutely.


Nov 12, 2009
10:21 pm
#14 Matt SF :

@ Andrew,

I like your reasoning on the other bubbles and pullbacks, but I’m just not sold on the idea that $1000 will be the price point where we level off long term.

Marc Faber gave some good reasoning why gold would never be below $1000 again (and he’s way smarter than me), so maybe I’m entirely wrong. That’s what makes it a market, but I’m just not willing to play gold outright at these levels.

Now, the miners on the other hand are a completely different story. I suppose that’s why they all removed their hedges so they could sell now or a little later.

Nov 14, 2009
1:15 am
#15 Johnny H :

Are we pretending that these traditional financial media sources can be trusted now?

While everyone and their Grandma knows the dollar is a POS, I can’t ever recall hearing something that was positive about gold from any regular commentator.

In fact the only people that are gold bulls are usually just brought on as a side show for the cheerleaders to laugh at: Faber, Schiff, Rogers.

I remember hearing this “gold bubble” talk at gold 500, and 800 dollar levels. I’ll sell my gold when interest rates aren’t in the toilet, stability and trust are higher, and the Dow:gold ratio is under 2.5.

I’d wait though.. I think the dollar could potentially come roaring back with a large correction in equities (also long overdue).

Nov 14, 2009
2:39 am
#16 Matt SF :

I trust Santelli and Najarian. They’re both experienced traders, let you know where they hold positions (Santelli no longer trades if I remember correctly) and let you know what to watch out for. It’s not that I’m looking for Yes or No answers, just the available options and landmines I might miss to make a good decision. Some of the other “money managers” that CNBC brings on occasionally seem suspect, but these two are among my personal favorites.

I do agree that CNBC has given the gold bulls a hard time in the past. I’ve seen multiple hosts give Peter Schiff the “he’s a kook” or call Nouriel Roubini “Dr. Doom” many times over. It’s rather obvious from their body language and short temperament they don’t like his message, so that does bother me because I do think that gold has a valuable place in a portfolio… just wouldn’t put new money to work at these levels.

It’s the manic buying, the assumption gold is a sure thing, and the fact that Grandma is talking about buying the GLD ETF vibe that has me on bubble alert.

You also make an excellent point about the USD — if the Fed makes even a hint it will tighten rates to strengthen the dollar, I think gold will take a hit and equities will roll over. Not sure what the odds on this happening since low rates and a weak dollar keep mortgage rates low and the carry trade alive.

Nov 15, 2009
9:00 am
#17 Andrew Bachagalupe :

Fiat system of paper money works when every country agrees to respect each other and be a “sound” international citizen and fiat money is kept in check by every CB on Earth.

Moment when one country trying to take advantage of the fiat system by endlessly printing and keeping currency low, system will start failing, and it will become just matter of time before everything fail..

China done it for about 10yrs and will continue to do it until it will be too late.
40y experiment with paper money coming to the end. We back to 6000 or so years of human history…

As usual old man Thomas Jefferson was right, :

The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals… it is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.

Nov 15, 2009
11:55 am
#18 Matt SF :

Good point, but I’d bet TJ’s wisdom would also be sounding the shenanigans horn when he saw the rapid valuation change in gold.

Hence the other famous quote… banking establishments are more dangerous than standing armies.

Moreover, their dangers are compounded when the bankers that run them also find themselves as governmental regulators.

Nov 16, 2009
10:18 am
#19 Chad :

I firmly believe gold is in a bubble formation that is currently being formed. I have traded gold professionally since 1999 and was purchasing my bullion at $272 an ounce when it was truly a great value. It amazes me how many people, even so-called educated individuals think gold is still a good value. Are you kidding me? I have seen this over and over again in my trading career. The herd is meant to believe something that is not true. Threat of inflation? No way, quite the opposite is true. Money is being destroyed not inflated. We will not see significant levels of inflation for years. Amazing how easy it is to fool the masses into believing something that is not true. The Wall street spin doctors are masters at doing that. Gold will initially fall early next year to around the $800 level, find some support at that level and consolidate and then go lower as the world finally realizes that we face continued unemployment and deflation and further contraction of the consumer. Anyone long gold or assets that normally do well in an inflationary environment will learn a costly lesson. This has happened before. Funny how things continue to be the same.

Nov 16, 2009
10:42 am
#20 Matt SF :

@ Andrew

Thanks man. I love to do the fundamental analysis and predict what consumers/investors will want to buy in the future, but all that stuff is just one part of the buying process. Nothing beats pulling the long term chart and identifying if you’re about to invest when the stock price is above or below the long term historical trend line. In gold’s case, it’s way above this trendline but not nearly as severe (yet) as the real estate bubble graphic from the NY Times. That’s just insane!

Plus, it’s just really cool to graphically show the similarities between all those bubbles. What goes up, must come down.

Nov 16, 2009
10:43 am
#21 Johnny H :

Money is being destroyed, but I don’t think anyone can argue it isn’t being created as well.

Actually has done quite well in deflationary environments…

Besides there are many more variables in play than simple inflation vs. deflation. For example, instability, war, debt, unemployment.

I do think gold will pull back, perhaps even to 800, very soon. But I would be very surprised if we didn’t see well over 1500 within the next few years.

If the US goes “back to normal” gold will soar and the dollar will get trashed even more.

Nov 16, 2009
11:08 am
#22 Matt SF :

@ Chad

Nice work on picking up gold when it was at $270. That’s how the pros pick up value investments, as well as properly diversify a portfolio.

I’m not well versed in the Forex market, so I don’t think it’s wise for me to comment about money being created versus destroyed. However, I am smart enough to follow along with folks I trust, so most of my projections revolve around Warren Buffett’s statement that the dollar will be worth significantly less than it is now when you look 10 to 20 years out.

Like you, that doesn’t mean I’m going to fall victim to the “value trap” or “value hype” that surrounds gold at these levels.

As I’m looking at gold hitting another (non inflation adjusted) all time high today, I’m just curious what price gold must hit to be roughly equivalent to the projected value of the US Dollar in 2019.

Nov 16, 2009
8:08 pm
#24 Matt SF :

Not hardly.

Nov 30, 2009
11:34 am

Wow…I guess I should have hit the “home” button and read your other post (this one) on gold Matt.

I’ve missed all the fun!

First, Najarian is a perennial gold naysayer. I have videos (trying to figure out how to get from DVR to computer) that I’m trying to put up on my site exposing his continued negative bashing of gold as well as Melissa Lee and other of the CNBC folks.

At the same time, Narjarian has been right about FCX and copper. But copper is not known the world over as money. FCX also got clobbered like every other commodity stock (including gold mining stocks) last year.

Yet interestingly enough, gold ended the year up for the 8th straight year and will do so again this year.

The short term I addressed in post #30 of your October 9th article “10 Reasons Why Investing In Gold Is A Bad Idea”

(which should be under your “related posts” no?)

As I said there, the U.S. Dollar index is still the key. Until that March 2008 low is broken, the dollar could bounce and thus gold fall. I hope it does. Then I expect to hear more of the gold naysayers claim victory….that is until the dollar index finally breaks through 72 and gold is well north of where it is now.

Holders of physical gold care not that gold goes to $800 on its way to $2,000 and higher.

Traders should be cautious. I’ll agree with that as you know.

Nov 30, 2009
12:14 pm
#26 David F :

I probably jumped into this a little too late, but I think you’re spot on with your analysis. I don’t see the Fed messing with interest rates any time soon, and as long as other central banks are interested in stocking up on gold it will have some room to grow. $1,300 would probably be a good point to take some cash off the table. I also agree mining companies are a good way to capitalize on gold.
.-= David F´s last blog ..Who wants to be a (virtual) millionaire? =-.

Apr 20, 2010
6:53 pm
#27 jhon mcqie :

Every financial TV network i look at is saying buy gold its going to 2000 every financial adviser is saying the same it just reminds me of the 2000 dot com bubble when every one said to buy. Be careful

Apr 20, 2010
9:06 pm
#28 Matt SF :

Well said Jhon! I agree, it’s very much like the 2000 tech bubble or the 2008 commodities bubble.

Apr 21, 2010
12:19 am
#29 Doug Digger Eberhardt :

Points to ponder…

Why is gold breaking out to new highs in EUROs?

Gold’s just a shiny rock right? You bury it in your back yard 10 years ago and dig it up today, clean it off and it’s still a shiny rock.

What changed?

It’s what gold is priced in that changes.

Right now gold is in a cyclical trend lower priced in U.S. Dollars as the Dollar Index is in a cyclical trend higher.

Right now gold is in a cyclical trend higher priced in EUROs as the EURO declines with the problems of the PIGS (Portugal, Ireland, Greece and Spain).

I’m looking for gold priced in YEN to be the next big mover. There is no reason for the YEN to be as strong as it is.

As far as comparing it to the bubble, what you’re really saying is the U.S. Dollar is going to get stronger (and thus gold would go lower).

Nothing could be further from the truth.

National debt over 12 trillion and a congress complicit in continually raising the debt ceiling, budget deficits, undeclared wars, state and city fiscal issues, pension shortfalls, bank failures, etc. etc. etc.

Add to that, future obligations in the trillions for Medicare, Social Security and Obamacare and GDP that is only fueled by the green shoots of government spending at present, with no hope of lower unemployment on the horizon and the writing is on the wall. Unfortunately it’s written in a language that few understand.

Hope you’re doing well Matt…and look! no url’s! lol

Apr 21, 2010
8:29 am
#30 Matt SF :

Yeah, you’re about 4 months behind Dennis Gartman on the long gold / short Euro trade, but better late than never. Have to dance while the music is playing, so the traders say.

Apr 21, 2010
11:24 am
#31 Doug Digger Eberhardt :

Actually, that’s not true. Gartman called the trade to go long gold in the British Pound in November. I wrote an article November 18th to look at going long gold in EUROs with a complete analysis as to how the EURO was approaching its all-time high, which made no sense as their debt situation as a whole was as bad as the U.S. Gartman subsequently added the EURO gold trade to his list.

Then in his January 22nd Newsletter he told everyone to get out of the Pound and EURO gold trade;

“We, however, are making a material shift in our sentiment toward gold this morning and we shall again mince no words as we make that shift: rather than owning gold in foreign currency terms, we wish to own it in US dollar terms, for we now fear for the dollar rather than cheer for it in the light of this battle between the President and the Banks. Where we once wished to avoid the bearish dollar bet that one is making when one owns gold in US dollar terms, in light of the battle that is shaping up between the President and the capital markets, we shall instead embrace that dollar risk.”

March 19th I wrote an article calling him out on it. He has since flip flopped again.

I met Gartman at the LPL conference in Chicago. He gave a speech where he readily admits he’s wrong 80% of the time. For that people pay him $5,000 a year for his investment advice.

His secret is in cutting his losers and letting his winners ride. Unfortunately, he quit dancing with the gold EURO trade which by March was up 7.92% from when I called it. At least he’s back on it.

January 22nd, he told traders in his Newsletter to get out of the

Apr 21, 2010
11:25 am
#32 Doug Digger Eberhardt :

that last line shouldn’t be there…delete please…

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