Wednesday, March 22, 2023

A New Gold Bubble Coming Soon?

Are we at the beginning of  a new gold bubble? 

A reader recently was looking at this blog entry from 2010, which I have updated as follows:

UPDATE 2023:  Gold has gone up - and gone down.  Usually the "little people" buy when it goes up, based on FOMO and because it is being hyped online.  Then it goes down and they sell at a loss - again due to fear.

Is gold a good deal?  A hedge against inflation?  A safe harbor?  None of the above?  I think the latter. As we saw in 1982, the price peaked and people had to wait two decades to get their money back, not even accounting for inflation.

Recently, there has been an increase in inflation and a lot of panic-talk about bank failures.  Surely this will spike the price of gold, right?  Yet, oddly enough, it remains relatively flat, if not in fact, decreasing slightly.  And maybe this is because all the gold-bugs went over to the Crypto sites and started obsessing about that instead, leaving gold to be what it always was - a commodity mineral, no different than diamonds, silver, or for that matter, zinc, lead, or even dirt.

Gold has gone up - and down - and really hasn't kept pace with even inflation.

If you look at the chart above, your first impression might be, "gold has shot up in value!"  But if you look most closely, you see that the guy who bought in March of 2022 lost nearly 20% of his investment by September of that year.  And if you factor in inflation, $1400 in march of 2018 is worth nearly $1700 today.  When you dial that into the equation, you can see that Gold isn't making wild gains after all.  In fact, your mutual fund likely did better over the same period of time.

So did the gold bubble "burst?"  Well, one of them did.  Maybe more to come, who knows?

This chart, from 2000-2023 shows the 2010 bubble.

As the chart above illustrates, in 2010, when I wrote this entry originally, the price of gold peaked at about $1800 an ounce and then dropped to about $1200 for a long time until 2020.  That's ten years to earn your money back, not factoring in inflation.   Factor in inflation, and that $1800 in 2010 should be worth $2400 today.  Yes, the gold bugs got burned if they bought in 2010.

So what does this all mean?  Well, in 2010, people were panicking because the economy was in the toilet.  2023 seems poised for that pattern to repeat again - panic and fear are ruling markets, people are pulling back from investments and new businesses.  Layoffs are starting to accelerate.  And the housing market is finally slowing down as interest rates rise.

Wait for it - 3...2...1....  Some idiot on social media is going to say "buy gold!" after they already bought it.

Wash.  Rinse.  Repeat.

Of course, some may argue, "Well, this time, I will get in on the ground floor and clean up when those other idiots buy in!"  And maybe that will work, or maybe it will not.  Maybe, if you are lucky, you may double your money in a few years.  Maybe if you are unlucky, you may lose half.   You could make the same arguments for buying bargain stocks when they hit rock bottom.

My only take is that if someone is hyping whatever it is on the Internet, it is probably a bad bet.