The way investing works is that most of your success will result from answering the most critical questions correctly. As a gold investor, the most important question for me to answer is whether or not gold is a bubble. The accurate response to this question will determine whether I have 100% gains or 50% losses. As you can see, this is not a question I want to take lightly.
All bubbles are not created equal - some bubbles are of the more mundane type, such as the bubble in home shopping stocks in the 1980s, and some are of the truly epic kind. The bubbles with the most profound effects on society are centered around one of the major asset classes (stocks, real estate, bonds, commodities). Bubbles in real estate wipe out latent capital on a large scale. Bubbles in bonds wipe out capital accumulation, period. Bubbles in gold, as you will see, come at the end of significant shifts in society.
Soros has called gold "the ultimate bubble." In many ways, he is absolutely correct. Gold rises and falls in accordance with public confidence. If and when gold achieves its spike move, it will be because people have lost confidence on a global scale. When people panic, they don't do it in an orderly fashion.
Real estate is an asset that is misunderstood because people as a whole don't understand the nature of inflation and leverage. There are two critical points to understand about real estate: 1) it is probably the best inflation hedge of all the asset classes, and 2) its value is derived in large part by leverage. Since real estate is a plain old inflation hedge, its rise follows a pretty steady trajectory. Another way of looking at real estate is to say there needs to be an outside catalyst (leverage) to bring housing out of trend. It was only when people put no money down (unlimited leverage) on their homes that real estate in the U.S. really took off. Leverage is everything in real estate.
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At the tail end of the real estate bubble, home values in the U.S. rose nearly 100% when historical precedent suggested a rise of 10%. For real estate, this is a huge move; for stocks, not so huge. Remember, each asset class is different.
Stocks are inflation hedges to an extent since companies will react relatively quickly to real inflationary pressures in the economy. If the cost of raw materials is rising, so will prices on the end goods companies sell. Most companies have a pretty narrow range in which they can sell their products: Any price just a little too high or a little too low can prove to be devastating.
This natural inflation-adjusting mechanism that companies have is counteracted by the nature of the stock market itself. While price and value will tend to converge over time, in the short run, there can be huge discrepencies. One of the reasons stocks are more volatile than real estate is that the average holding period for stocks is not measured in years; in fact, it is often measure in minutes. Humans will always behave irrationally and turn legitimate stock movements based on improving fundamentals into bubbles.
Gold is not the inflation hedge most people think it is. Here is a data point that will give you some perspective. In 1869, gold traded at $162; in 1969, it traded at $35. How gold hedged inflation in any way over this period of a century is lost on me. It is a fact that stocks and real estate more closely tracked the rate of inflation.
Price movements in gold resemble price movements in stocks. Intense bear markets are followed by spectacular bull markets, which culminate in a spike move fueled by human emotion. The same 100% moves in real estate that would signal a bubble of massive proportions are normal moves in gold. While the price movement of gold in absolute terms is important, the price movement of gold expressed in relation to time is even more important. A 100% rise in five years means nothing, although a 100% move in two months means everything. Everyone invested in gold should be more focused on time.
Each asset class moves to its own rhythm. To say that gold is a bubble merely because it has risen 6x is just plain ignorant. Gold has always shown that it is an asset that lies dormant for decades, only to experience the biggest moves in the shortest amount of time. There is no reason for me to believe that "this time is different." Gold has yet to do anything but trend upwards in a classic bull market formation. If and when the trajectory of the rise steepens, that will be the time to start thinking about getting out.
Disclosure: I am long GOLD.