It’s looking like we’ve found our next bubble. And it didn’t seem to take us very long.
(I wrote in an old post, “In an old issue of Outstanding Investor Digest from 1980s, I was struck by one investor’s comment about the Japan real estate bubble. He talked about how rare bubbles are, and how he considered himself lucky, from an academic standpoint, to see a real-life bubble in his lifetime.” I’m no Robert “Bubble Master” Shiller, but anecdotally, it does seem like they’ve become more frequent. The full post has my speculation as to why.)
First, what I don’t know: whether gold will go up or down the next six months, year, two years, etc. I’m suspicious anyone does. What I do know: We’re in the middle of a big gold party, people will eventually leave, and some poor fools will be left with the check.
Some very smart people, e.g. David Einhorn and John Paulson, as well as more pedestrian investors (though mutual funds like gold ETFs) are buying significant amounts of gold because they believe the dollar will lose its value and gold will appreciate in comparison. Fine. They may be right. But the major problem with gold is that it doesn’t do anything. It just sits there and collects dust. Its quoted price is way out of whack with any type of decorative or industrial use. Unlike cash in a bank, it doesn’t generate interest and compound, and unlike cattle, gold doesn’t mate and multiply. Thus, it doesn’t really have an intrinsic value close to its quoted value. And you can’t exactly use it to buy stuff. Taunter waxes hilarious when he taunts his buddy for buying gold as a hedge in the event of a Mad Max-caliber catastrophe where paper money is worthless: “Why would some random guy selling gas or food who did not trust the currency accept shavings of your ingot instead? If he did not trust any institution of government to function, wouldn’t he just steal your ingot? Or at the very least, not show any more appreciation of shiny gold metal than tattered green paper?”
The catch about gold is that it has to be converted back into currency for it to be of any use. In theory, a bond, a stock, or a house can at least continue to produce income. Gold can’t. Since there’s no intrinsic value to gold, in order for the quoted value of gold to keep increasing, by definition, there have to be greater fools who think the value of gold will go even higher because even greater fools will buy it from them. But when the greatest fool finally buys in, the market necessarily crashes. And it’s not like it hasn’t happened before: We had real, honest-to-god inflation in the late 1970s, but gold investors got killed — prices didn’t come back to those highs until recently, about 30 years later.
In order for Einhorn and Paulson to make money on gold, they’re going to have to get out of the burning building faster than most of the other folks at the party. (Author’s note: They run wildly successful, multi-billion dollar hedge funds. I don’t.) And they might pull it off. But they should recognize that they’re playing a high-stakes game of musical chairs.
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