Gold Bubble Is Epic

Includes: ABX, GLD, GLL, IAU, KGC
by: Glen Bradford

Gold is in an epic bubble. Perhaps this bubble has just burst. Sure, I think Gold could go much higher, but speculation is a better fit for the argument to own gold than considering it an investment. Thus, I am concluding that the terminology "investing in gold" is a misnomer. I want to introduce a way of thinking about gold that makes you wonder.

(Click charts to enlarge)

Gold - The Asset of No Return

I ask you what would you would be willing to pay for an ounce of gold if one individual decided to acquire all of the gold in the world and bury the cube underground? I believe that at that point in time, Gold would cease to be a store of value. Right now, all the gold in the world allegedly fits into a 67-foot cube. Half of the gold out there is owned by central banks. Going forward, I am going to define an asset as something that if you owned all of it, its value to others would not go down. Here are a few examples.


I believe that if I acquired all of the gold in the world, it would become worth much less to others. In contrast, I believe that if I purchase all of the outstanding shares of Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), or any company that is growing and producing greater discounted streams of future value, the companies would more or less be worth the same to others. In all probability, the value of the companies would likely go up over time if I picked the right ones.


Consider purchasing all of the farm ground in North America. You can acquire all of the farms and the underlying value isn't likely to decrease, all things equal. Farm ground can be worked to generate consistent future income and growth. Does it make sense that one should be able to trade all of the gold in the world for all of the farm ground in North America?


If I acquired all of the oil in the world... just look to Saudi Arabia for the answer to this question. OPEC has become enormously wealthy simply because it has the majority of the oil.

In Summary

Gold is one of those things that has very little intrinsic value but holds value because it has always held value. It's this type of thinking that puts you into bubble territory. If this ceases to be the case as I expect it to, it will become the definition of what is a "greater fool asset."

It's happened before
People who have developed a love affair with gold will never sell it at any price. I think that's fine. Let them have it. They argue that metal coins have never been debased. Challenge accepted. So, if you think gold is "safe," I urge you to reconsider. The timing for a collapse seems appropriate. At this point, fear is receding and gold is set to recede along with the fear. That said, we are not out of the woods regarding the poorly structured Eurozone, which I think is getting worse and will drag the global economy down with it. Weakness in industrial commodity prices is a net negative for China's insanely leveraged housing bubble as well. GLL as an alternative way to short gold sure looks appealing for the time being.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.