The price of gold topped $1200 per ounce this week. Should you jump on this bandwagon? Do you think you will miss the trade, and thus the profit? This trader will miss both the bandwagon and the trade.
Gold is another bubble, one that is getting pretty inflated. Yes. I understand that some reputable analysts have projected gold to reach $2000, or even $5000 per ounce. May be it will, but one should look at this trade carefully because it reminds me closely of the same call from some of the same analysts in the summer of 2008. Back then, the commodity was oil and the price target was $200 per barrel. Just imagine if you had jumped on that bubble when it hit $147 per barrel. If you held on thinking it would continue its meteoric rise, how did you feel when it finally reached $50 per barrel again after languishing in the $35-$45 range for a while.
My point is gold is another asset bubble born from U.S. Treasury and Federal Reserve policy. In this case, deregulated banks have nothing to do with the bubble, but low rates do. No, not mortgage rates, short-term interest rates. Keeping the Fed rate as close to zero as one can forces traders/investors away from the dollar. Quantitative easing, injecting liquidity into the system, and huge deficit spending as well force traders/investors to flee the dollar, and where are they going? To gold is the answer.
The question is how fat will this bubble get before it pops. The answer depends on perception. As soon as those who have pushed gold to these heights perceive the fiscal/monetary policies of the U.S. are turning away from stimulus and back toward balancing the books (Fed and Treasury) this trade will return to the fundamentals, which brings me to this—what do the fundamentals say about gold?
Aside from India purchasing some 200 tons worth of gold from the IMF around the $1085 per ounce, where is the current and future demand? Dentists no longer use gold in their work, and with consumers hoarding money worldwide, is purchasing gold jewelry going to force the demand? As to the supply, it would appear miners are working overtime to meet the current perceived demand.
It is never a good idea to invest as the stampeding crowd does, unless you start the stampede. Perhaps those who started this bubble trade and those who got in early will benefit, but remember, every trade is a zero-sum game. Those who find themselves entering in the last part of the stampede will balance the gold trade equation out. The question is, when will the stampede reverse direction?
