Tuesday, October 06, 2009

Yet Another Gold Bubble Warning from Fortune Magazine

It is good to see another article about a gold bubble after gold shot up $27 today.

But amid the buying frenzy and after a decade-long run-up that has seen the price quadruple, is gold still a smart investment? The simple answer: Wherever the price of gold is headed in the long term, several market watchers say the fundamentals indicate that gold is poised to fall.

And even if you fret that the government's pullout- all-stops effort to rescue the financial system and revive the economy will lead to inflation, there are better hedges than the yellow metal.

This has the be the most wild boosterism of gold I have ever read.

Hathaway, who manages $1 billion at the Tocqueville fund, sees gold soaring for several reasons, including rising inflation and the rather curious fact that in two previous instances the price of an ounce of gold and the level of the Dow Jones industrial average have come close to converging.

In 1933, when gold traded at $32 an ounce, the Dow bottomed out at 50 in February. In 1980 gold climbed to its high of $850 on Jan. 21, when the Dow closed at 873. Today Tocqueville sees something similar happening, with gold rocketing to $5,000 or $10,000 an ounce (the Dow is now at about 9700).

I'm sure Mr. Hathaway knows that you can't take two data points in 76 years and interpret them to be the future price of gold. It is almost the exact same thing as saying "even a broken watch is right two times a day." You would think that a massive gold booster like this should know that something that occurs twice in 76 years (one time is the highest price that gold ever reached) does not make a trend.

In any case this article lays out a supply and demand argument on the price of gold similar to what went on during the Oil bubble last year. There is just so much more gold on the market from increasing mine yields ($40 billion in new projects since 2001) and the booming scrap gold market that demand can not hope keep up. You add to this the fact that industrial and jewelry demand is down 20%.

I also have to agree wholeheartedly with this guy:

Kitco analyst Jon Nadler says gold is setting record prices amid "some of the poorest fundamentals I've seen in the market for a long time." He suspects the recent rise has been driven by large hedge funds and institutional investors making momentum-driven trades. As for fears of financial collapse, "The sky did actually fall last year -- and it was good for $1,035 gold," says Nadler. "But that's about where the worst ends."

I think a great argument for $5000+ gold would be the imminent demise of the financial system that we saw last year. When Lehman died there could have easily been a world wide chain reaction that could have killed just about every bank and broker in the US and maybe even worldwide.

I mean only now are we seeing credit markets functioning okay and money market funds starting to feel confident again. In fact this guy says that gold is a crappy investment long term and he recommends other assets. He figures that they would be a better bet to hedge against the Obama induced inflation that we will see in 3 -5 years.

Like Rogers, Arnott thinks common commodities are a smarter choice. He suggests iShares GSCI (GSG), an ETF that tracks the broad S&P commodities index. Arnott also likes using Treasury Inflation- Protected Securities, real estate investment trusts (REITs), and emerging-market bonds, which you can buy through the PowerShares Emerging Market Sovereign Debt ETF (PCY). Many developing countries are commodities producers, so if U.S. inflation kicks in, their currencies will gain strength and their debt will rise in value.

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