Gold Bubble 2011 now Bursting and Crashing
Gold has been plunging in New York on speculation that financial markets may be stabilizing, eroding the appeal of the precious metal as a safe haven.
Bullion has tumbled from a record $1,917.90 an ounce yesterday — Wells Fargo & Company (Ticker Symbol: WFC) said climbing speculative demand from investors had pushed the market into a “bubble that is poised to burst.”
“We believe that we have reached the point where we can confidently state that interest in gold investing has reached the level of a speculative bubble,” the bank’s investment team wrote in a market update issued August 15, 2011 — “Prudent investors should be very wary of having substantial investment exposure to this precious metal in their portfolios.”
Oh, gold prices may go up again, but investment advisers and regulators are warning investors to be careful about putting too much of their money in gold.
Quickly and with very little warning, the bottom can drop out on gold prices — during a six-month period in 2008, gold lost more than 30 percent of its value. In the 1980s, in just over two years, the price plummeted about 65 percent.
Before the “Bursting in the Gold Market” — gold gained 31 percent in 2011 as burgeoning global debt crises and turmoil in equity markets boosted the appeal of the metal as an alternative asset.
Unlike investing in a stock that pays a dividend or in real estate where you can collect rent, gold has no inherent earnings power. Investors have to hope that someone else will come along and pay more than they did — the “Greater Fool Theory” — when gold hit $850 an ounce in January 1980, it took until January 2008 — 28 years — before investors who bought at the high broke even.
Investors are paring down positions in gold on expectations Bernanke will do something to boost equity prices.
Investors should be cautious about claims that tie a gold company’s stock to the rise in gold prices and about scare tactics that gold is the safest bet against inflation or an economic meltdown in the United States or Europe.
We are seeing the exact same behavior at the height of the Tech Bubble, Housing Bubble and the Japanese Nikkei Bubble — investors need to know that gold is not a silver bullet. People want to believe there is a sure thing but there is no such thing as a sure thing.
As of Friday August 26, 2011 — Gold closed at $1,697.00 per ounce. Gold is now down $220.90 or 11.5 percent per ounce from its peak set in August 2011.
Tags: A Sure Thing, Bernanke, Bursting in the Gold Market, Dividend, Europe, Financial Markets, Global Debt Crises, Gold, Gold Bubble, Gold Company, Greater Fool Theory, Housing Bubble, Japanese Nikkei Bubble, New York, Portfolio, Precious Metal, Real Estate, Safe Haven, Speculation, Tech Bubble, United States, Wells Fargo, WFC