Waiting for the Gold Bubble to Pop

With gold prices at a new all-time high, investors may be wondering when the bubble will burst. However, there are many reasons why it may continue to grow rather than pop. Read more in this full blog post from The Mess That Greenspan Made.

The gold price reached a new all-time high today at $1,457 an ounce and most investors are probably just shaking their heads at the craziness of it all – who in their right mind would pay almost $1,500 for a dumb ‘ol one ounce gold coin? Of course, they were shaking their heads at $1,200 an ounce, $1,000 an ounce, $725 an ounce, $500 an ounce, and so on, calling it a bubble ever since the price started rising about ten years ago when you could have bought the metal for about $300 an ounce. That’s one tough gold bubble…

In Frank Holmes latest commentary over at U.S. Global Investors, he explains some of the reasons why the current gold bubble just doesn’t seem ready, willing, or able to pop, the chart below offered up as evidence that, in a world full of increasingly suspect paper money and paper assets where more investors are looking for something other than dodgy paper, the yellow metal remains under-owned.

Citing a recent presentation by Eric Sprott of Sprott Asset Management, Holmes notes that new investment in gold over the last ten years totaled about $250 billion versus almost $100 trillion that went into other financial assets over that same time. That’s not to say that, as a percent of all assets, it will ever get back to the levels seen prior to 1990, but, based on everything that’s been happening in the world lately, it’s certainly headed in that direction.

This blog was republished with permission from The Mess That Greenspan Made.

One Investors Strategy For The New Year

Are you trying to figure out what to invest in this year? Well Toni Straka from Prudent Investor, knows what his investment portfolio will be made up of in 2011. Read the following post to learn more about Straka's strategies and predictions for the new year.

BONDS: The 20-year interest rate downtrend reversed in 4Q10: Short all government bonds (and hope your counter party will remain solvent.)

Rising rates will become the tightening noose for all debtors. Mortgage holders may find comfort by switching to fixed rate contracts as far out as possible.

SHARES: As inflation heats up, go long energy, food stocks (and convert ensuing profits into gold.) Underweight consumer (durables) products in a cool economic environment, short debt-laden financials, especially the "dumb money" insurance sector.

DERIVATIVES: Stay away from all OTC instruments as your contract will ultimately only be worth as much as your counter party can pay. Square all derivatives in disguise like ETFs.

COMMODITIES: Buy silver as it is still 70% away from its nominal high seen in 1980 and has a dual use as money and industrial resource. Take profits once gold:silver ratio has descended to 1:30 and reenter after technical consolidation. All other commodities have reversed and have overshot the mean by now.

CURRENCIES: Buy the real stuff - gold. All other fiat currencies are just a claim on some central bank counter party and historically they have all wrecked their product via inflation in the last 300 years.

Once you have done this handful of trades, turn off the charts, lean back, contemplate the world and check back here in January 2012.

This post was republished with permission from The Prudent Investor.

When Academics And Investors Disagree

Academics and investors don't always see eye to eye. New York University professor Nouriel Roubini who warned of the financial crisis in 2006, is predicting a bubble in gold and stocks while successful investor Jim Rogers strongly disagrees and argues that the real bubble is in US bonds. See the following post from Expected Returns.

From Bloomberg, Rogers says Roubini wrong on bubbles as gold, stocks rally:

Jim Rogers, the investor who predicted the start of the commodities rally in 1999, said that Nouriel Roubini is wrong about the threat of bubbles in gold and emerging-market stocks.

Many commodities are still down from record highs and equity markets aren’t on the brink of collapse, Rogers, chairman of Singapore-based Rogers Holdings, said in an interview on Bloomberg Television today. The price of gold will double to at least $2,000 an ounce in the next decade, he said.

The only slight disagreement I have with Rogers has to do with timing. I believe gold will spike to $2,000 in the next 2-5 years, and here's why. You have to think about what the likely drivers will be to the price of gold. One driver is the value of the dollar. A move to $2,000 in gold implies an orderly decline in the dollar, which is unlikely based on the degree of monetary stimulus we're pumping into the system. To add, the number of dollars outside the U.S. is staggering, and there is a clear move to diversify (read:dump dollars) foreign currency reserves. China has been dumping dollars for gold, and India just made noise by buying 200 metric tons of gold. Remember, Central Banks are conservative institutions, meaning they are not selling their gold anytime soon.
Gold and Commodities Bubble?

Roubini, the New York University professor who warned in 2006 about the coming financial crisis, said on Oct. 27 that investors are borrowing dollars to buy assets and creating “huge” asset bubbles. Rogers said that he’s not buying stocks now, though he may buy more gold.

“What bubble?” Rogers said, when asked if he agreed with Roubini’s view. “It’s clear Mr. Roubini hasn’t done his homework, yet again.”

Roubini told a conference in South Africa last month that investors were doing “the mother of all carry trades” by buying assets with borrowed dollars. He said emerging-market equities are showing a bubble, that gains in some developing- nation currencies are becoming “excessive” and that the rally in oil is “not justified by the fundamentals.”

The burden of proof is on Roubini to demonstrate that the dollar carry trade is going to unwind in the near future. As long as the dollar exchange rate is depressed and interest rates in America remain low, there is absolutely no incentive for investors to unwind their trades. I know the consensus is for the Fed to raise rates sometime next year, but with the underlying weakness in our economy, I don't think that's a viable option.
Rogers Bearish on U.S. Treasuries

In contrast to Roubini, Rogers said the only bubble he sees in the Western world now is in U.S. bonds.

“I cannot conceive of lending money to the U.S. for 30 years,” he said. “Other than that, I don’t see any bubbles going on, unless he knows something the rest of us don’t know.”

The standard line is that investors will flee to the perceived safety of U.S. government bonds if we were to be hit by another shock to our system. I don't see that historic pattern holding this time around. You are starting to see stocks and bonds getting sold off simultaneously while gold rises. I believe these are three secular trends to look for in the future.

Why would you buy government bonds with virtually no yield when you can buy gold? In a no yield environment, gold is the smart play here, not U.S. bonds. Keep in mind that persistent debt issuance results in an exponential growth in servicing costs. In other words, there will come a time when a critical mass of the population realizes our debt is untenable. When that happens look for Treasuries to tank while gold rises parabolically.

This post has been republished from Moses Kim's blog, Expected Returns.