{"id":23972,"date":"2011-09-19T18:03:12","date_gmt":"2011-09-19T22:03:12","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/09\/19\/gold-has-the-bubble-finally-burst\/"},"modified":"2011-09-19T18:03:12","modified_gmt":"2011-09-19T22:03:12","slug":"gold-has-the-bubble-finally-burst","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/09\/19\/gold-has-the-bubble-finally-burst\/","title":{"rendered":"Gold: Has the Bubble Finally Burst?"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a>World stock markets are down this morning on renewed worries of a Greek default.\u00a0\u00a0 Adding fuel to the fire, President Obama\u2019s proposal to levy a new tax on millionaires\u2014dubbed the \u201cBuffett Rule\u201d after being suggested by billionaire superinvestor Warren Buffett\u2014has drawn a sharp rebuke from Congressional Republicans and threatens to unleash more political instability on a crisis-weary public.\u00a0\u00a0 And U.S. homebuilders, citing the effects of never-ending foreclosures, are even more despondent than feared according to the National Association of Home Builders survey released this morning.<\/p>\n

With the finance world appearing to teeter on the edge of disaster, one might expect that standby crisis hedge\u2014gold\u2014to rise.<\/p>\n

Yet a funny thing happened this morning.\u00a0 The price of gold actually fell<\/em> sharply.<\/strong><\/p>\n

The spot price of gold has continued to drift lower after surging to new all-time highs above $1,900.\u00a0 As this article is being written, the price has fallen to $1,783 and appears to have lost all momentum.<\/p>\n

Gold\u2019s recent weakness comes even as competing crisis hedges have lost their luster.\u00a0 The Swiss National Bank took a sledgehammer to the Swiss franc two weeks ago, pledging to lower its value against the euro.\u00a0 The tactic worked, sending the franc down nearly 10%.\u00a0 U.S. Treasuries\u2014considered by many to be the ultimate safe haven for their liquidity\u2014now yield far too little to be attractive for most investors.\u00a0 The 10-Year note yields a miniscule 1.95%.<\/p>\n

Gold\u2019s recent action should be deeply disturbing to gold bugs or to anyone using gold as a refuge from the market\u2019s volatility.<\/p>\n

While I hesitate to definitely say the gold bubble has burst (the market gods tend to punish those who would be so vain), it is becoming increasingly likely that this is the case.\u00a0\u00a0\u00a0 You can never say with certainty until after the fact, but the anecdotal evidence suggests that the peak\u2014if we haven\u2019t seen it already\u2014is near.\u00a0 Let\u2019s take a look at a few today:<\/p>\n

1. European central banks are buying gold again.<\/strong>\u00a0 The Financial Times<\/em> reported this morning that European central banks have become net buyers of gold again for the first time in more than two decades.\u00a0 These bankers buying gold near its all-time highs above $1,900 were the same people who couldn\u2019t get rid of their gold fast enough when it was trading below $300 per ounce.\u00a0 This shocks even me.\u00a0 While I\u2019m not surprised to see emerging-market central banks go down this route\u2014Mexico, South Korea, and Thailand have all been big buyers this year\u2014even a cynic like myself expected the Europeans to have learned their lessons.<\/p>\n

In any event, given the dismal timing record of central bankers, investors should use this as a contrarian indicator to bet the other way.
\n<\/strong><\/p>\n

2. Gold appears to be overvalued relative to other precious metals.\u00a0 <\/strong>The price of platinum will generally trade at a significant premium to that of gold; as recently as five years ago, the platinum price was nearly double the gold price.\u00a0 This makes sense, as platinum is far rarer and has far more industrial uses in addition to its role as jewelry.\u00a0 Yet today, gold is more expensive than platinum.\u00a0 Why?\u00a0 Because it\u2019s not being aggressively hoarded by speculators and by investors searching desperately for a safe haven.<\/p>\n

Gold\u2019s traditional use as jewelry has been in steep decline for years, even while record amounts of it are being salted away in bank vaults for \u201cinvestment purposes.\u201d\u00a0 This doesn\u2019t mean that the price will fall tomorrow, but it should raise questions about the durability of a bull market in gold.<\/p>\n

3. The smart money has started to lose interest.\u00a0 <\/strong>George Soros made quite a splash earlier this year when he exited his rather large position in gold (See \u201cSoros is Selling Gold<\/a>\u201d).\u00a0 While no one should mindlessly ape the trading moves of another investor\u2014even one as talented as Soros\u2014it can still pay to take note of what the all-time greats are doing.\u00a0 If Soros no longer sees value in gold, it is fair to ask:\u00a0 Why should we?<\/em><\/p>\n

\"\"<\/a><\/p>\n

The Donald likes the gold.<\/p>\n<\/div>\n

4. It\u2019s all about The Donald<\/em>.<\/strong>\u00a0 I include this one more for comic appeal than anything else.\u00a0 Donald Trump made headlines last week by accepting $176,000 in gold bullion as a security deposit from a new tenant.<\/p>\n

In his comments to The Wall Street Journal,<\/em> Trump said \u201cIt\u2019s a sad day when a large property owner starts accepting gold instead of the dollar\u2026\u00a0 If I do this, other people are going to start doing it, and maybe we’ll see some changes.\u201d\u00a0 <\/em><\/strong><\/p>\n

While Mr. Trump has made billions as a property developer, he also has a habit of putting his foot in his rather large mouth.\u00a0 It would only be appropriate if this blustery political rant marked the top of the bubble.\u00a0 Add Trump\u2019s little publicity stunt to the \u201cbear\u201d column for gold.<\/p>\n

The gold bubble appears to have sprung a small leak.\u00a0 It could still be patched, of course, and we could see the bubble expand a little more before it pops.\u00a0 But given gold\u2019s recent lackluster performance in the face of continued crisis, I wouldn\u2019t bet on it.\u00a0 Once the bubble begins to deflate in earnest, the gold bugs are not likely to fare any better than Miami condo speculators or \u201cdot com\u201d true believers.<\/p>\n

If you liked this article by Sizemore Insights<\/em>, you\u2019d probably enjoy The Sizemore Investment Letter<\/em>, our premium members-only newsletter. Click here<\/a> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

By The Sizemore Letter World stock markets are down this morning on renewed worries of a Greek default.\u00a0\u00a0 Adding fuel to the fire, President Obama\u2019s proposal to levy a new tax on millionaires\u2014dubbed the \u201cBuffett Rule\u201d after being suggested by billionaire superinvestor Warren Buffett\u2014has drawn a sharp rebuke from Congressional Republicans and threatens to unleash … <\/p>\n

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