Global Economics
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Is gold the next investment bubble?
Posted on 19 February 2009 with no comments from readers
When looking at the chart left the obvious truth that seems to be staring us in the face is the build up to a bubble. Gold has formed a perfect base for a near vertical ascent period, up towards $1,500, $2,000 and $3,000, perhaps peaking around $4,000 as it passes the Dow Jones Index on the way down. Inflation and a collapse of the dollar, not necessarily in that order, will be the final forces that channel investors en masse into this rather small investment class, producing a classic price spike. Can you not feel the trumpets sounding as $1,000 approaches?
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We got through $1,000 on Friday while the Dow fell below its low – the scissor movement is just starting.
The tiniest gold stocks still offer huge value, my Linux Gold shares jumped 20% yesterday – that was well ahead of even the best of the best gold producers. So much for the idea that the junior explorers might lag behind in this rally, they appear to be leading it.
I think you need to read this..
http://blogs.zawya.com/matein.khalid/090202054231/
Are you talking about this one Peter?
http://finance.yahoo.com/q/pr?s=LNXGF.OB
Yes – it is declared as a stock I own in my Gold & Silver Top Tips section, see right-hand navigation.
The argument is that the smaller, riskier stocks will perform best in an upturn – Marc Faber has recently strongly tipped this type of gold exploration stock. They were hammered last year, so you need to be particularly brave to buy them now.
Personally I think a precious metals portfolio should have a 10-20% exposure to smaller stocks like these – but the risk is too great to go much higher than that, also individual stock selection is very difficult.
Linux Gold was the top tip of the greatest gold analyst of the 1970s last year – Joseph Granville – who is still publishing his newsletter aged 83. He seemed to think Linux had the same qualities as previous super-stocks of the 70s with undervalued claims next to existing gold mines, no debt, good management, etc. The share price has been a lousy performer and I have considered dropping it – but in the past when I have done that with stocks they have always recovered strongly.
From Mark O’Bryne on SeekingAlpha today:
We will have a gold bubble and a gold mania in the coming years. There is no fever like gold fever. However, we are a long way from there yet and gold will have to reach its inflation adjusted 1980 high of $2,400/oz in 1980 before it can be classed as overvalued. It is currently less than half the value that it was in 1980.
There cannot be a bubble in an asset class unless it rises to all time inflation adjusted highs and often times asset bubbles result in prices of multiples of their previous record highs.
In January 1980, just before the Federal Reserve avoided an inflationary catastrophe, the gold price peaked at $875. That is $2,430 in today’s dollars. But the pools of speculative capital are much larger now than in 1980. A true gold bubble could well leave this benchmark far behind.
And if the dollar collapses (‘Former Bank of England official expects dollar collapse’) as some fear and the US suffers virulent stagflation or hyperinflation then we will rise way above the 1980 inflation adjusted high.
Gold rose by more than 2,400% (from $35 to $850 or up X 24 times) in the 1970s . Should a similar bubble form now gold would have to rise from a low of $250 in 2000 to over $6,000/oz.
The Nasdaq rose some 1600% from some 300 in 1990 to over 5000 in 2000 ( up X 16 times). Should a similar bubble form now, gold would have to rise from a low of $250 in 2000 to over $4,000/oz.
Even the Dow Jones went from 1900 in late 1987 (after crash) to over 14,000 (up X 7 times). Should a similar bubble form now, gold would have to rise from a low of $250 in 2000 to over $1,750/oz.