Is Gold a Bubble? Maybe It Doesn't Matter

Includes: GLD
by: Roger Nusbaum

Gold has obviously gone parabolic. We have owned the SPDR Gold Trust (NYSEARCA:GLD) since it was in the mid-$50s (Feb. 2007), which was shortly after it started trading. I have said over and over that we own gold because it tends to go up when people are scared -- like in the face of some sort of external shock.

What is going on now might be called an internal shock in that it is financial and economic events causing the panic, or what looks like panic. Part of the equation must be perceived debasement of the US dollar and something similar with the euro.

For now, gold is obviously playing the role of counter-strategy to equities. As you know, gold tends to have a low correlation to equities, but not always of course. For the last couple of weeks, it looks like the correlation is perfectly negative -- almost, anyway. Gold will not always be this effective of a counter-strategy, which is okay as long as you realize this. For now it is very effective, and my hunch is that it will keep going up for a while until equities find a bottom or this current event otherwise plays itself out/calms down.

Understand that I don't really care if it is a bubble (mania would probably be a better word) that pops because we have a modest allocation. I've been saying for years that I have never understood the 20% in gold crowd because the price is so volatile; while it is "working" now, it will not always work. The difference in consequence of holding gold at the wrong time when it is 20% of your portfolio versus 5% is huge. Just like any other asset, finding out you had too much after a large decline is a bad place to be.