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Nikhil Nichani
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  • Is Gold Really As Risk Free As It Seems? 1 comment
    Aug 10, 2010 10:49 PM

    In the 90s, the hot thing to invest in were internet stocks.  In the 2000s, it was a house.  In 2008, it was oil.  And finally in 2010, it is gold.  In today's time, gold is marketed everywhere, with commercials on the radio to economists making prediction for $10000 an ounce of gold in the near future.  These predictions might bring back a lot of memories to those who experienced the predictions of the internet stock days and the housing days and when oil was trading close to $150 a barrel.  Back in the 90s, internet stocks were supposed to hit $1000 a share for almost every company, taking the Dow with them to 20-30,000.  Then when that market crashed, focus shifted onto housing, and housing prices were supposed to rise forever because technically, our country hasn't seen a bad enough housing market before.  Then there was oil, shooting through the moon everyday.  The higher it went, the more ridiculous the predictions got with people predicting $300 a barrel.  Today, Gold presents the same exact risks and the same exact aftermath as all the instances in the past I just mentioned .

    Gold prices have been on a rapid incline for the majority of the last 3-5 years.  Over the last year, gold prices are up near 25%.  In the last three years, gold is up an outstanding 78.4%.  That is a huge price gain for just a three year period.  A big part of the reason for this jump in prices was because people started seeking shelter from the free falling equity and housing markets in 2007 and 2008, and demand for gold rose through the roof.  However it didn't stop there.   Once money started flowing into equities again, gold didn't stop its bullish run.  Since the equity bottom in March of 09, gold is up roughly 29%.  This rapid gain in prices should start raising some serious red flags.  Even though equity markets have rallied big time since March, uncertainty about the economy as been high which caused gold prices to rise as well.  But with stocks still seeming relatively cheap for the long run compared to bonds, one has to wonder exactly how much longer money will stay in gold.  The higher gold goes, the more expensive it becomes and the more prone it becomes to large scale pull back once money starts flowing into other assets.

    Gold presents no physical risk to its investor, as it will always be around and it will always be valuable no matter what kind of market conditions we are in.  But it presents an enormous nominal risk to every investor, and the higher it goes the greater that risk.  Gold is no different from any other asset in this world, and it will also face the force of gravity over time.  A  78% rise in three years should definitely be raising some eyebrows, and I would highly recommend any investor in gold to start taking their profits and look for other assets.  Gold may even go up a little bit from here to $1300, but the nominal risk involved compared to the downside that is looming for gold is pointing towards the asset not being a safe investment like the entire investing world takes it to be, and definitely puts your earnings from it in harms way.  Always remember, its essential to be on the right side of the bull and bear markets, but it is absolutely critical to understand that no bull market goes on forever.  And the larger the bull market, the more horrifying the preceding bear market will be.

    Disclosure: No Positions
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  • Old Trader
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    The "risk" you speak of, is only defined in dollar terms. Gold does best as a way of "maintaining" wealth, rather than increasing it.
    10 Aug 2010, 11:29 PM Reply Like
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