Is TV Signaling a Top in Gold?

Includes: GDX, GLD
by: ChartProphet

Television may be signaling a top in gold in a similar way it signaled a top in housing.

At the height of the housing craze, with the “unlimited potential” involved in rising real estate prices, some investors pocketed huge gains by “flipping” houses. By purchasing houses that either needed repair or were simply selling at a discount to market valuations, investors were able to renovate the houses or quickly resell them for considerable gains. This method, or strategy, became so lucrative for some investors, that buying houses to actually live in or sell years down the road no longer proved necessary; “flipping” was the new fad.

And “flipping” was not only deemed lucrative for the few who had real estate expertise. Starting in July 2005, with home prices already up a few hundred percent in many areas, television networks began documenting and promoting the “flipping” process for those who hadn’t yet caught on. First, on July 14th, the Discovery Channel premiered “Flip That House,” documenting the renovation of a Las Vegas home that was to be flipped. Next, on July 24th, “Flip This House” (very original) was aired on A&E, following a Charleston-based real estate company focused on doing the same. It seemed as if the doors were opened for the next generation of real estate investors.

But as is the case with most lucrative investment themes – they don’t last forever. And not only do they not last forever, but they can also prove to be highly damaging for those who miss the boat and get in too late. In fact, the week that “Flip That House” made its premier was the exact top in the housing market! Not just a warning signal or a precursor to the ultimate peak – it was the EXACT top!

Take a look at the following chart (click to enlarge images):

As you can see, homebuilders such as DR Horton (NYSE:DHI), KB Home (NYSE:KBH), Lennar (NYSE:LEN), and PulteGroup (NYSE:PHM), saw gains as high as 500 percent in less than four years as the housing market uproar sent real estate prices soaring. But after the massive gains, the ultimate top was reached the week of July 18, 2005 – the exact time that “flipping” became the “norm.” The rest we are familiar with: those who failed to get out in time saw their investment value nearly disappear, the housing bubble collapsed, and the market spiraled downwards as investors fled to the exits. Television, with its focus on informing the masses, had signaled the top; “flipping” was no longer a secret.

If the media craze about housing was a model for any future fads, we may be in the midst of another bubble yet to be popped – the gold bubble. Never mind the slew of reasons why gold looks dangerous here: rapid price run-up, no hedging by miners, extreme speculation, and the introduction of gold vending machines to name a few (see “Gold Bubble: Final Warning?” / “Why Inflation Isn’t Affecting Gold Prices” / “Forget Gold, Buy Diamonds”). But if you weren’t concerned until now, maybe the “TV Bubble-Warning” will:

On December 3, 2010, the Discovery Channel premiered its new show “Gold Rush Alaska.” Just like their 1849 California Gold Rush predecessors had done, the men portrayed in this new show will leave their homes and risk their lives in search of big profits as they dig for gold in Alaska. Yet while they may end up turning a considerable profit, especially since the show has already been recorded while the gold bubble was still raging, the “Gold Fever” may soon be over. And that's not to say that operating a mine is equal to flipping a house, in that it is probably much easier for the average person to flip a house than to mine for gold; but the portrayal of potential profits to be had by getting involved in the gold theme are definitely akin to the potential profits that were presented in the housing shows.

If “Flip This House” and “Flip That House” signaled the peak of the speculative bubble-hunting in the housing market, “Gold Rush Alaska” may prove to do the same for the gold bubble, which may have started for the right fundamental reasons and which has made a considerable profit for a numerous bunch, but which may ultimately end in disaster for those who have joined the party too late.

If “Gold Rush Alaska” is our second “TV Bubble-Warning,” the following chart may signal the top:

Disclosure: I am short GLD, GDX.