Is The Gold Bubble Popping? 3rd Quarter Update

Nov. 30, 2011 7:27 PM ETGLD, PHYS, GDX66 Comments
One Eyed Guide profile picture
One Eyed Guide
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The question that every gold investor should be asking is, “Should I sell because the gold bubble is popping or should I buy more as a safe haven against a euro-based market crash?”

Concerns that gold is acting like a risk asset don’t come close the describing how serious this is for gold valuations. It’s the failure of "flight to safety/safe-haven" purchasing to support gold prices during the self-destruction of the euro that puts a dagger in the heart of conventional gold valuation.

A safe haven is an asset that is uncorrelated or negatively correlated with another asset or portfolio in times of market stress or turmoil. Research shows that gold is a safe haven against stock shocks (but not bonds) provided you own it before the shock – buy 1 day late and you lose money.

Normally, the euro-mess would result in recommendations to purchase more gold but concerns started earlier this year that gold was so highly valued that it would start to act as a risk asset. Between September 20 and October 3 gold appears to have transitioned from a hedge/safe-haven to a risk asset that follows the market as shown in the chart below.

Gold Shift from Safe to Risk Asset

When gold prices were first pushed down in September the excuse was that hedge funds were puking up everything, including gold. Now, you have discussions about countries using gold as a guarantee on bonds – this is the equivalent of countries puking up gold and will be negative for gold in dollar terms. Europe has gold worth $620 billion at current prices – 3 times the $191 billion bought in the last 12 months. The linked article talks about discounting gold to $1000/oz. on Italian bonds-Ouch, that’s an eye opener, even if it represents an end-of-the-world projection.

Adding the lack of safe-haven

This article was written by

One Eyed Guide profile picture
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The One Eyed Guide (http://www.oneeyedguide.com) is Bob Small who: solo traveled to 25 countries by age 21, has a degree in Economics, an MBA from Columbia University in Marketing and Finance, has been a brand manager, was a licensed stock and options broker during the 87 crash, ran a $450 million dollar business and raised $8 million for charity.

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