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Chris -Lethos- Bourton | lethos

Nine Responses to the Gold Is A Bubble Crowd

Jan 28th 2011 at 1:57 PM

The “Gold is a Bubble” crowd has been reawakened.

CNN warned earlier this week: Gold is a bubble, resist its charms.

Gold’s six percent fall in the last six weeks and the Amex Gold Bugs Index (HUI) nearly 20% decline have signaled the gold correction is here.

The correction has emboldened the anti-gold crowd more than they have been since the 2008 credit crunch.

The correction is has been a tough one so far. But it has not shown itself to be anything more than just a correction. And ifhistory is any example, it will last about two more months and gold will be returning to new highs by the end of 2011.

Despite the needed correction, gold’s future is as bright as ever. Contrary to rising opinion, gold is not in a bubble…yet. Here are nine reasons why.

1. Still Waiting for the Blow-Off Top

The top of every bubble has been marked by a massive, parabolic surge in prices.

The NASDAQ rose from 1500 to more than 5,000 between October 1998 and March 200. That was an 18 month increase of 233%.

The last gold bubble ended in three years of significant and accelerating increases in annual average gold prices. Gold went up 30.81% in 1978. It rose 58.72% in 1979. And “the top” was marked by a parabolic 99.74% increase in 1978.

Gold prices have risen at an annual average rate of 18% in this current bull market. In the last three years gold has risen at a 16% annual rate.

Even best-case scenario intended to skew the numbers to the most extreme fails to match previous bubble tops. Gold rose at annual average rate of 29.8% from its 2008 lows to its 2010 all-time high.

These increases are indicative of a bull market, but pale in comparison to past bubbles.

2. Gold Hasn’t Gone Mainstream…Yet

Bubbles suck a lot of investors in at the top. Panic buyers,  fearful of missing out on an opportunity to get rich quick, rush in at the end in droves.

For example, in 1970, investors had $48 billion in stock mutual funds.  By the top of the stock bubble in 2000, investors had more than $7 trillion in stock funds. In 2000 investors plowed $309 billion of new capital into stock funds. That’s five times more than all of the money invested in funds in 1970.

Stock fever was well-dispersed too at the top too. The New York Stock Exchange found 7.5 million Americans own stock in 1954. The number of stock investors rose 10-fold to 78 million in 1999.

Currently, gold and gold stock investors are still very much the minority:

3. The “We Buy Gold” Advertising Fallacy

One of the often cited signals of a gold market top is all of the “we buy gold” companies which buy jewelry from people.

The argument is completely misguided. These are service companies which buy gold at discount (ranging from 20% to 40%) and then have it refined.

A higher gold price makes the business more profitable, will attract more customers, and allow for greater advertising budgets, but it’s not a signal of the top. A better signal would be seeing these companies failing as the masses refuse to sell their gold because “it’s going to make them rich.”

Read the rest of the 9 here on Jutia Group

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