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I am a keen student of human behavior and the fundamentals on how markets work, how distortions occur and how those distortions unwind themselves. My current interests are to find out if human behavior itself is the biggest factor moving markets where biases justify every failure/success of a... More
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  • Gold Is Going Back To $354 An Ounce

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    Gold is going back to $354 an ounce and most individual investors will not profit from it. GLD, GDX, GOLD, AUY, ABX

    I said it, you heard it and you are not going to act on it unless you are a Rookie.

    My assertion is that your humanity is preventing you from acting on this.

    Too many emotions are involved here. You can read my article just like you have read so many articles on SA both from Bulls and Bears. You can doubt my motives and my credibility. So before you start doubting my motive, please understand it. I am writing a book on Emotional Trading/ Behavioral Economics. In a year from now I want you and your friends and your family to buy my book. In the next few months as the gold bubble deflates I will gain my credibility. I will also make a small amount of money when this bubble bursts. My primary motive of writing the book is to make you informed on how your humanity is making you a weak player in the stock/commodity markets.

    Let me show you a picture of a broken chart. What you can see from the chart is that while the peak of the chart was reached in roughly 7 years, the peak to bottom was a fairly quick drop. This is where a lot of the money can be made but will not be made by the individual investor. I will discuss in my book why this is the place where a lot of money is made but why individual investors very rarely make money in this phase.

    (click to enlarge)

    Now why would a rookie make money trading gold in the next few months after just reading a few technical analysis books? Well he/she does not have an emotional relationship with gold. You don't believe me? OK Fine, I will show you a few more charts. But before you see these charts, you need to have a clear mind.

    I don't know how you can clear your mind, I just have a few suggestions, see if any of these work.

    1. Forget about the fact that you were right when you bought gold for the first time at whatever price.
    2. Forget the feeling of excitement you had when gold was flying up every week.
    3. Forget the feeling of being right for years when regular traders were not paying attention to commodities but you were winning every week.
    4. Forget the feeling you got when gold hit new highs day after day after day.
    5. Forget the feeling you got when you did not jump out of gold and it recovered from the whiplashes. You had outfoxed the foxes.
    6. Forget about how you shared you excitement with friends, coworkers, relatives, neighbors etc
    7. If you are already making a loss, forget about how much loss you are making.
    8. Forget the fact that you could have sold it at "x" price , or you would have sold it at "x" price, or you should have sold it at "x" price.
    9. Forget the fact that you could have bought it at "y" price , or you would have bought it at "y" price, or you should have bought it at "y" price.
    10. Forget the could have bought at or sold at, should have bought at or sold at , would have bought at or sold at.

    Take a walk to clear your mind. Take in some fresh air. Listen to some inspiring music, look at some beautiful paintings, Go for a quick jog, blow off some steam with friends. Whatever you do, get the emotions out of this financial conversation. Unless you are relaxed, you will not see the point I am trying to make here. And I am trying to make a point besides trying to sell you a book in the future.

    Look at these charts below. Each one of them shows how a bubble forms and then pops. I have taken some charts from various bubbles: stocks, commodities, even the tulip bubble, bit coin bubbles, whatever.. Notice the fact that it takes time to build but very little time to deflate.

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    Let us try to do a thought experiment to try to become successful traders. You get an invitation to attend a Party. There are a few rules for attending the party.

    1. When you join, you contribute $1 to the kitty.
    2. When you leave the party, you will get your $1 back and also get + 1 cent per additional person who joined the party after you joined, You need to pay "minus 1 cent" per person for the people who left the party after you joined.
    3. So you gain 1 cent per person if you leave the party when the party has more people than the time you joined Or you lose 1 cent per person if you leave the party when less number of people were still at the party when you left.
    4. Mathematically : amount_you_leave_with = $1 + 0.01x - 0.01y

    Where x= number of people who joined the party after you joined.

    y = number of people who left the party after you joined

    Example: Let us say that when you joined the party, there were 5 people in the party. When you left, there were 7, so you will get $1.02. On the other hand if there were 7 people in the party when you joined but only 5 left when you left, you will lose 2 cents.

    You join the party. More People soon join the party, some of them leave. After a few hours the crowd is thinning. More people are leaving the party than the ones joining. Suddenly you realize that the last person left in the party is going to lose the most cents. But the music is still "ON" the lights are "ON" so you are hoping that people will still join the party and you will get your money back. You also know that when each of the other person still left in the party leaves, your loss is getting bigger. Each of the other guys left in the party also know this, they are all on the phones trying to call other people to join the party. But it does not seem to be working. You are hoping that even if you do not get the full 1$ back if a few more people join, at least you could reduce your losses. There are a few things you do know though. The party is going to end at some-point and you do not want to be the last person left behind to do the dishes. What is the optimum strategy at this time? Can you predict the value of this investment after a few hours? Will it be bigger or smaller? How can you tell if more people will join or not? If it is already late, could it be that all others who could join might be at a different place, not willing to come in?

    If you play this game, there are various strategies and the guests are trying them all. Some of them left quite early itself, some were trying to count the rate of increase of people joining, some did not let greed take over and left early as long as they were gaining something. Some decided that whenever the number of people goes down 15% from the peak number of people ever at the party, gain or loss, they will leave. Some were looking at what is the average number of people in the party in the last 25 minute or 50 minutes or 200 minutes to decide whether to stay or leave.

    The gold party is similar, except some people came in with a lot of money and some had a lot of information on how the party is going to proceed. Maybe they were standing on the roof, counting the people coming towards this party while you were enjoying, maybe something else helped them.

    I believe that the ones who had to profit from the gold boom party have already left the party. Others do know that it is going to end at some time , they are trying to drum up support/ create confusion to get more people to join the gold party. If they could get more guys to join, they could reduce their losses. There are still people attending the party who had joined quite early so they are still profiting but if they stay invested and the collapse continues, all the gains will vaporize in thin air at a rate much faster than the rate at which the gain occurred. These are mostly good hard working people, they all knew that the party wound end sometime, some of them felt that it will start ending when gold hits a higher peak than ~ $1900(maybe ~2500 or so). Unfortunately they don't know how to calculate what the value for this commodity. Some of them are really confused about the difference be price and value, yet they invested in this market as it felt good. (Again this is their humanity at work)

    Fundamental Analysis for Gold

    The price of any product is the price that a ready and willing buyer is ready to pay for it, no more no less. Gold is quite liquid and there are thousands of places that trade it. In fact this is its only real advantage over other investments. Let me compare it to real estate. When you buy real estate property you can either live there or rent it out. Let us say real estate prices go down, if you still live in the house, it is still fulfilling your need for shelter from the environment. If you are renting out the property, you still get some rent. A lot of us Americans found out recently that the price that buyers were willing to pay in 2006 for a house was very different from the price that they were willing to pay in 2009 for the same house. When gold prices go down further, it will be because of the same situation. No one would be willing to pay higher price for it.

    Let me give you more drastic examples to illustrate this concept further. Let us say that you have 1 Kg of Gold that you bought for a few million dollars. You are flying on your private jet with that gold. Suddenly there is an accident and you need to land the plane on a remote island without any other humans in sight. Your family and friends tried their best but no one was able to find you. You have been surviving somehow for a few years. Suddenly a boat stops on the island. The boat owner offers you that he will take you back to civilization if you give him that gold. You probably will. And it would turn out that what you got for your gold was a few $ per ounce. Again when the liquidity went away, the price really crashed.( So if there are no competing buyers the price can really fall to a very low level)

    Now let us say, you were traveling by commercial plane when this accident occurred and there are 4 humans who survived including you.. The other 3 have tools that can help them hunt animals or fish to survive on the island. You offer gold for the tools. In this case even 1 Kg of gold will be worth less than hunting or fishing tools worth $50 that you can buy from orchard supply hardware(OSH) or walmart(NYSE:WMT). ( this is again a case that shows that there is no fundamental value of gold unlike that for tools)

    I can compare price of gold to a cow that gives milk and in the right circumstance you will go for a cow rather than a lot of gold too. But I leave this to your imagination. But I will say this : when any analyst talks on TV about the fundamental value of gold, think about the "cow" analogy. Is it more precious than a cow that gives gallons of milk every day or less precious if no one is buying it. The cow's milk at least can provide you nutrition unlike gold. Interestingly there are hundreds of people worldwide who might be comparing an investment between a cow and gold right at this moment and if gold loses either its liquidity or its value as a hedge, the cow would win..

    Recap: The price of any product is the price that a ready and willing buyer is ready to pay for it, no more no less.

    Gold CPI PPI myths that will bust again over the next few weeks.

    Gold Price has no auto-correlation with either of the two at this time. It is only correlated in the imagination of people and those who were hyping Gold. A lot of economists added fuel to that fire too. In science one aberration causes a theory to be abandoned. Years of data shows uncorrelated relationships between gold prices and CPI/PPI. The fact that only roughly 10% of the gold mined each year will ever be used for industrial consumption points to the fact that once investors and speculators back off, a lot of gold is available to push the prices down much lower for industrial consumption.

    Example if no one wants to buy gold for jewelry starting tomorrow, 50% of all gold mined this year will get added to the gold available to the industry. That is 5 times the gold that the industries already use per year. If investors also stop buying new gold then 1 year current production of gold is enough to last for 10 years for industrial usage. What price do you think the industry will pay for gold if they know producers have so much surplus gold available. Now if investors start dumping gold( that they bought in previous years), the situation becomes worse and worse for gold.

    Thought exercise: Will you take up an extra job if your family does not have milk/bread/cheese to consume or a place to live in? Will you take up an extra job to buy gold? Now all humans will answer these questions differently but my assertion is that a majority of human beings will not take an extra job to buy gold. So intuitively you can see that linking Gold Price to CPI is disingenuous. If there were any people that were taking extra jobs to buy gold(or stretching their finances to buy gold), once they see the gold prices evaporating , they too will have a huge disincentive to do that.

    $800/Ounce bottom myth

    There are traders that are claiming that $800/ounce is going to be the bottom price for gold as this is the price based on CPI increases from 1970 onwards. Please understand that this is baloney. If gold was as fundamental as wheat or rice or milk for humans where the price elasticity of demand was really low, it could have worked. Unfortunately it is substituted quite easily and the price and value of this commodity at this time is really out of synchronization here. To explain this further, I will give you some examples below when I go over some of the other myths.

    In 2002 the spot price of gold was roughly $256/ounce. And for decades it was less than $400/ounce. So what happened to the CPI to price correlation then? Don't fall for this. Some of these same speculators are trying to create buyers out of ordinary people when they themselves are selling like there is no tomorrow. So unless you are 100% confident this is the bottom, this is not the time to jump in. To understand a bottom you need to understand what the value of gold is, and whether the price is close to the value or not. Experience tells us that commodity bottoms take years to form. Greed is good sometimes but jumping in front of a train to pick up a penny or two is not the right investment strategy.

    Asians will buy myth

    A lot of gold backers are saying that Asians will buy gold and support gold prices if prices fall further. Now there are a few problems with the theory.

    1. If Asians believe gold is a hedge against bad circumstances, it cannot be something that goes down 30% in 12 months. A hedge has to work. The recent history of gold prices decline is a big deterrent for the Asian middle classes to step in right now. They will eventually step in but at a much lower price.(it will be closer to $354 than at $1200) Again what is the "value" of a hedge that does not work? If I try to sell you a washing machine that does not work. How much would you be willing to pay for it? (if you repair washing machines, it could be valuable to you, otherwise ?) A better analogy would be a home security system that works 30% of the time, how much would you be willing to pay for it if you are really afraid of your house getting burgled.
    2. Indian government is going against it. Indians (the largest owners of gold in the world) cannot mortgage gold any longer in the rural banks. They can mortgage their house(real estate) but not their gold. This is bigger than what it might seem to a casual reader. What is the value of an asset that you cannot borrow against? Is it lower than a value of an asset you can borrow against or higher? Now if this same asset also loses 30% in 6 months, is it more desirable or less?
    3. Gold is no longer the status symbol. Don't get me wrong, it is still a status symbol. A smart phone or tablet computer is more cool. In fact the gen x and gen y with disposable incomes in India/China prefer consumption rather than accumulation of assets. Also when they see their friends/relatives/neighbors that were accumulating gold getting bust, what do you think they are going to do after they stop laughing? You be the judge.
    4. Gold demand in Asia is roughly down 20% in 2012. That should be a hint on what direction it is going to go this year particularly now when everyone knows its price is declining like there is no tomorrow for it.
    5. If India and Greater china just go back to the 2009 levels of buying gold, it would be almost half the amount of gold that they bought in 2011. That itself can bring gold prices further to its knees.
    6. Has gold become less valuable to Asians with the advent of easier credit since 2005? This requires a full article by itself but what you need to know is this. Gold was a very popular hedge for Europeans and Americans too in the early 20th century. However with easier access to credit its popularity went down significantly in the last 80 to 100 years. Asia has had a huge credit boom, what does it mean for the popularity of gold? How do these falling gold prices change the rate of change of popularity for gold is something you should think about and something I use to calculate the value for Gold.

    Extraction cost Price Myth

    Repeating: If gold was as fundamental as wheat or rice or milk for humans where the price elasticity of demand was really low, it would have worked. Unfortunately it is substituted quite easily. A lot of gold backers are saying that the extraction cost of gold itself is $1200 per ounce for most mines so it will no longer go below that level. There are a few problems with this theory:

    1. Go to any western country shopping mall and you will see that a lot of the jewelry here is 10 carat gold or less. Take this jewelry anywhere in the world and it is still very desirable to wear. Even though it is using very little Gold. So I think Gold can be substituted quite easily. The jewelry market which uses no gold is billions of dollars per year too.
    2. If one company said that it is unprofitable for it to make personal computer for it when price goes down guess what happens, others stepped in to make those same computers at lower costs and still make handsome profits. There are enough number of profitable gold mines in the world that will satisfy the demand for industrial gold even at $300/ounce. Or automation processes will be improved to make that happen. Or industries will change to substitute gold for other metals.
    3. Let us say: it takes me a million dollars to extract 1 ounce of gold from seawater in US, does that mean that the right price for gold is $1 million/ounce or does that mean that I am going to go bust doing it?
    4. Look at how gold performed from 1985 to 2005 in the chart below. For 20 years it fluctuated between roughly $260 to $480 with roughly $354.60 being the approximate average price. Yet the demand of gold balanced the supply well enough.

    (click to enlarge)

    Gold is going to the moon myth

    There is some truth to this. You see a lot of semiconductor devices use a very small amount of Gold. Your smart phone or your computer has probably 50 cents worth of gold. So if any satellite delivers a payload to moon or mars for that matter, a very small amount of gold will actually go to the moon or mars. But we are talking about 10s of dollars worth of gold going to the moon. It is not going to change the spot price for gold certainly and don't make investment decisions based on this.

    Gold prices going to $5000/ounce myth

    Again, if there are enough buyers to pay $5000/ounce for gold, it can go to that price range. My read of the situation is that it is not going to happen in the next 20 years. Or putting it another way $354/ounce is going to be much earlier than $5000/ounce. The reason it will not occur is that we humans have a good enough memory not to repeat the same mistake for at least a few years if not a few decades. So once we are out of the gold bubble we will not invest in gold for some time to come( we will fuel other bubbles though). That will prevent the next bubble in gold from forming for a few decades. Also there are a lot of individual investors who are feeling the pain of 20-30% losses or more right now. Some of them will sell any time gold tries to rally and will not sell for a loss even if they have to sit on losses for 20-30 years.(even if they miss huge growth opportunities elsewhere) That is a huge resistance that Gold has for years to come.

    Gold prices are going to $0 myth

    This too is not happening. Once the price comes down to roughly $354 to $400 range, my software model predicts that the consumption will balance the production nicely and it will settle there for some time to come. In fact prices could undershoot this target by 20% to 25% but that would be a good time to buy to make a quick gain. Unfortunately most of the individual investors are getting mislead by speculators calling the bottom at the current prices. They will get burnt, and they will miss this good opportunity when it arrives. Free market economy often determines values of goods by bringing the prices so low that only the most efficient operations survive. If then there is more demand, prices re-adjust. But this takes a long time and is very painful for the people caught in the middle.

    New applications for Gold Myth

    This dog is too old to really learn new tricks. When you compare gold to investments in stocks, again it is not too attractive. Unlike good companies that are able to go after new markets, commodities like gold don't get new applications overnight to stabilize falling prices. Example: Tesla (NASDAQ:TSLA) electrified the electric car market with its highly popular cars, Amazon (NASDAQ:AMZN) is entering new markets and giving its competitors a run for their money, Apple changed the whole smart phone industry, Unipixel (NASDAQ:UNXL) is changing the way displays of the future will be made, Netflix (NASDAQ:NFLX) is changing the way TV is delivered to consumers. The best new application of Gold that I could find is the Verigene system from Nanosphere(NASDAQ:NSPH) that is trying to save real lives in Emergency rooms. Gold unfortunately is not going to have a new killer application whose demand is so high that it could cause a new gold boom. NSPH though is an interesting company to watch out for if they can fulfill their potential. I am biased there as I have small positions in NSPH and UNXL.

    Fed printing Trillions so gold should explode myth

    I had to address it as there is so much focus in the media on this. Few Questions so you can yourself understand if this is real.

    1. How many of the newly printed trillions are actually being used to buy gold?
    2. Why gold is going up in price, why not iron ore?
    3. If all assets should inflate due to this printing, why is you house not valued 4-6 times what it was valued in 2005?
    4. If only precious things become more precious due to this, why did diamonds not go up 4-6 times in price in the last few years?

    Follow the money

    Look at all gold mining stocks and see when the insider sales were. That will give you a good hint on what insiders are thinking about gold. How many insiders are buying recently. And if they are not buying, should you be buying at this point. Also look at what the governments in the world are doing, they are slowly reducing the price targets for Gold. As the spot price keeps going down they will keep on doing that. They don't want to create panic in the market but look at the direction of gold price projections and that will give you a hint on what direction gold is moving.

    Sentiment

    A bubble bursts when there are no new buyers for what the sellers are selling but the losers on wall street need buyers so they can limit their losses. So they spread confusion on the direction of the commodity. They will not agree till it bursts and when it does, they will be back working on the next bubble. I started writing this article when the spot gold price was over $1450/ounce. I had predicted that as the price keeps going lower, "experts" will keep on predicting a lower and lower prices but they will not predict the right prices in one go. I see this happening all the time these days where those who were predicting $1300 bottom, started predicting $1200 bottom then $1050 then $900 and so on..

    There are large investors who know that the bubble is going to burst but they want to slow down the pace of the bursting bubble so they can sell call and buy put options and make money if the commodity stays within a range or bubble deflates slowly. There are also brokers who want bubbles to deflate slowly as then they can make more commissions when bubbles deflate slowly. So when someone says on TV that gold will only go down the $900/ounce or $800/ounce this year, try to figure out what the motivation of the person is. Is he or she helping you or helping his or her own finances. And try to figure out if it will go to $800 or $354.

    Factors that go into calculating value of a commodity like gold

    There are a few factors that go into calculating the value for a commodity. They can be divided into demand and supply factors. Price elasticity of demand and supply need to be looked at for arriving at various equilibriums. If 90% of a commodity has industrial uses, elasticity is different vs if only 10% of the commodity will be ever used for industrial consumption. The disposable income of buyers and the availability of other luxury goods competing for this disposable income are other factors that I have used to calculate the value of Gold. E.g.. The disposable income of Asians(main buyers of gold) is rising (though not 3 to 6 fold), but so is the availability of other competing luxury goods and investments that are competing with gold. I have used these factors in my calculations. The percentage of gold bought as a luxury good vs a hedge is something that I have used in the calculations. How falling prices affect the "value" of the hedge is another factor that I have used on the demand side. How instability in Europe/ china could make a hedge more desirable is something I looked at.(If you can only take 1 gun to a fight, you cannot afford to buy a gun that fires only 30% of the time, unless you have no other choice) How availability of credit or non collateralizing of an asset decreases the need for a hedge is another thing that I looked at.

    On the supply side the cost of labor, energy and management has been used. How inflation/deflation concerns, unemployment rate of semi-skilled labor has affected wages over the last 11 years is something that is put into my calculations. Again this needs to be done for the main countries that produce gold and whether the demand for labor from another competing industry is there or not. Regulatory and environmental regulations/fees need to be factored into the cost of production. A good number of mining companies always operate at a loss as any profit that the company makes is distributed between the executives of the company. This kind of distortion makes calculations of production cost difficult but one needs to see through this haze to calculate production costs. This is something I have tried to do in my calculations.

    Role of the media

    I must say there are a lot of journalists who were warning their communities about the gold bubble and in some cases helped people understand the risks associated with investing in commodities. However a lot of people who are getting free media access are trying to say things which benefit them and its my feeling that the statements/comments they are making are not in the interest of the overall community. I feel that sane voices often don't get this kind of media access so if you are a journalist feel free to use the information you find here to write your own articles and educate your community on the danger of investing in gold at this time. Talk to economists in your community to understand if gold is somehow "special" or are we in a middle of an exploding bubble. You don't need to quote me, ask any economist in your community the following few questions and you will get the answers. Educate your community so they can avoid being victims of such bubbles. There are still a lot of common people who will lose money because they do not understand how to find the value of gold.

    1. How do you calculate value for a commodity?
    2. For Gold, does supply side matter more or does demand side matter more?
    3. Why did gold become less popular in the western countries?
    4. Is access to credit expanding in Asia?
    5. Did gold ever have a bubble before? Did other commodities have bubbles?
    6. What is special about gold that its price went up by 4 to 6 times in the last few years?

    Summary and Conclusion

    Wall Street had worked hard to help inflate the gold bubble, before selling a lot of gold short. If you check out some articles from SA you can get an estimate of how many tons were shorted at the peak of the bubble . Now if you had shorted even a small amount, you could've been in trouble. Because as they say the market can stay irrational much longer than you can hope to remain solvent if you bet against it. In fact when the balloon was inflating, almost all who were betting against it lost.

    If you are part of the market(party) makers though, it is a different matter. As long as you are shorting make sure the other big guys are shorting too and no one is going to make you to cover at higher prices. These guys know game theory better than the average person who is playing on the other side. They keep tab on what each of them is doing too. Plus they have your retirement money to play with too. Remember the time they added the commodity Mutual funds to the 401k plans. Yes , that money is playing against you too. The gold that you have in your retirement plan is borrowed by the big wall street geniuses who short gold to bet against your retirement plan and you. This probably does not sound convoluted. However for most people it is.

    We love to party so when the gold bubble party started, where were we? Middle and Center. We love a good party and if there is one going on, why would we not be there. (We humans love a good party) We had promised ourselves that before the party will be over we will be out of the party and back home safe and sound, rich and prosperous. (We humans love to dream too)

    Sorry to break the bad news, the party was over more than 6 months back. You had set up mental stop losses which never triggered as you felt the lower it goes, the bigger value it is. After all Warren Buffett says "buy value" and be greedy when others are … This is your humanity playing tricks on you. In some cases you were averaging down waiting for the relief rally but others were cutting their losses. All at a time when Goldman Sachs was telling its clients to openly short gold..

    The party did not get over just by itself, there was a lot of hard work that went into getting it to conclude. Once a lot of our friends at Wall street sold a lot of gold short, what did they have to do next? They needed to burst the bubble. If the bubble did not burst quickly, the short positions will need to get covered. There is no fun in that. How do you burst a bubble? It can burst on its own when new buyers do not join the party but a little help does not hurt anyone.

    A small part of mainstream media went on war with gold. You started seeing the following headlines. Some of these you might have already seen. They will become more and more prevalent.

    1. Gold is just a yellow metal with almost no industrial applications. Only 10% of it is really needed by industry, everything else is just for jewelry and speculation.

    2. No currency is hedged to gold at this time.

    3. Extracting Gold has a very adverse environmental impact. It is not even ethical to own it.

    4. No- one I mean no sane individual should be buying commodities. Why would you do that?

    5. What were they thinking when they were investing their IRA's and 401k's in commodities anyway?

    6. Commodities should not be more than 6% of your portfolio and that too should be a mix of 8-10 different commodities. So Gold should be roughly .6%. If you are not doing this, you are not diversified. So you suffer.

    7. And so on..

    Not everyone on Wall Street shorted the gold at the same time, some really believed it is going higher before popping. But all of them watch and act quickly. So when the weather changes, the losers need to limit their losses too. They need to publicly defend their investments while they privately hedge against them. When you make an investment decision, you are competing with all these people. A lot of these guys will publicly say that they have not sold any of their gold. What they will not tell you however is that they have bought put options to insure almost all their gold. The reason they are predicting $800 or $1050 and $1200 bottoms are so that other moms and pops jump in to sell them put options or buy gold from them so their losses reduce.

    Take a look at how costs have come down over the years in all labor intensive industries. Do some due diligence to understand how automation and technology is reducing labor costs in almost all industries. How will the reduced price of extracting gold affect gold mining industry going forward? Do some due diligence to understand how disposable incomes are behaving for the middle class all over the world in the last few years. How will that affect gold demand? Do some due diligence to understand how competing goods or more "cool" goods affect the buying behavior of people. Will a 25 year old with a small disposable income prefer a smartphone, or gold? Will he prefer a gaming console or gold? How are these things affecting the overall demand of gold? What justifies this commodity to go up by 6 times in 6 years? You need to be sure that if you are buying gold, are you buying a bottle of tap water worth $3.50 for $12 just because someone else had once paid roughly $19 for it or is it really valuable?

    I leave you with this final chart. My assertion is that this is the current bubble that is bursting. What do you think the gold price will be when this bubble fully deflates?

    (click to enlarge)

    Request for feedback

    As I am writing a book that discusses how our human behavior creates bubbles, I do appreciate your comments. My read is that at this time there will still be lot of investors who are hoping for a relief rally that is not going to come(the bull trap is already over: search bull trap to understand what I mean). Also there will still be a few individuals who will feel that they are buying value. And there will be a few who are still in denial that the party is over. It is my opinion that very soon gold investors will be in the panic mode but you may or may not agree. I want to get your comments at this time so I can add some of these to my book. I will appreciate if you could mention in your comments whether you would be OK that I could use your comments in my book. Also I will post more articles when this bubble reaches the next stage. Again, this is my opinion only, so take it with a pinch of salt. I have put in 100's of hours of research to see if this is a real bubble or not. I encourage you to do similar research before you invest as it is your hard earned money and a lot of people want a part of it. Though this article is primarily about gold, people with interest in GLD, AUG,SLV GDX GOLD GG TLT GDXJ should also look at this.

    Disclosure: I am short GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I have short and long put options on GLD. I am long both UNXL and NSPH. I might trade in or out of any of these positions or any other positions at any time in the future. You should not use this article as an investment advice. You should do your own due diligence to confirm/deny anything you read in this article.

    Jul 09 1:50 PM | Link | Comment!
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