The Gold Bubble

Expected Returns's picture

The way investing works is that most of your success will result from answering the most critical questions correctly. As a gold investor, the most important question for me to answer is whether or not gold is a bubble. The accurate response to this question will determine whether I have 100% gains, or 50% losses.  As you can see, this is not a question I want to take lightly.

All bubbles are not created equal- some bubbles are of the more mundane type,  such as the bubble in home shopping stocks in the 1980's, and some are of the truly epic kind. The bubbles with the most profound effects on society are centered around one of the major asset classes (stocks, real estate, bonds, commodities).  Bubbles in real estate wipe out latent capital on a large scale. Bubbles in bonds wipe out capital accumulation, period. Bubbles in gold, as you will see, come at the end of significant shifts in society.

Soros has called gold "the ultimate bubble." In many ways, he is absolutely correct. Gold rises and falls in accordance with public confidence. If and when gold achieves its spike move, it will be because people have lost confidence on a global scale. When people panic, they don't do it in an orderly fashion.

Real Estate

Real estate is an asset that is misunderstood because people as a whole don't understand the nature of inflation and leverage. There are two critical points to understand about real estate: 1) it is probably the best inflation hedge of all the asset classes, and 2) its value is derived in large part by leverage. Since real estate is a plain old inflation hedge, its rise follows a pretty steady trajectory. Another way of looking at real estate is to say there needs to be an outside catalyst (leverage) to bring housing out of trend. It was only when people put no money down (unlimited leverage) on their homes that real estate in the U.S. really took off. Leverage is everything in real estate. 

At the tail end of the real estate bubble, home values in the U.S. rose nearly 100% when historical precedent suggested a rise of 10%. For real estate, this is a huge move; for stocks, not so huge. Remember, each asset class is different.


Stocks are inflation hedges to an extent since companies will react relatively quickly to real inflationary pressures in the economy. If the cost of raw materials is rising, so will prices on the end goods companies sell. Most companies have a pretty narrow range in which they can sell their products; any price just a little too high or a little too low can prove to be devastating.

This natural inflation-adjusting mechanism that companies have is counterracted by the nature of the stock market itself. While price and value will tend to converge over time, in the short run, there can be huge discrepencies. One of the reasons stocks are more volatile than real estate is that the average holding period for stocks is not measured in years; in fact, it is often measure in minutes. Humans will always behave irrationally and turn legitimate stock movements based on improving fundamentals into bubbles.


Gold is not the inflation hedge most people think it is. Here is a data point that will give you some perspective. In 1869, gold traded at $162; in 1969, it traded at $35. How gold hedged inflation in any way over this period of a century is lost on me. It is a fact that stocks and real estate more closely tracked the rate of inflation.

Price movements in gold resemble price movements in stocks. Intense bear markets are followed by spectacular bull markets, which culminate in a spike move fueled by human emotion. The same 100% moves in real estate that would signal a bubble of massive proportions are normal moves in gold. While the price movement of gold in absolute terms is important, the price movement of gold expressed in relation to time is even more important. A 100% rise in 5 years means nothing, although a 100% move in 2 months means everything. Everyone invested in gold should be more focused on time.

Each asset class moves to its own rhythm. To say that gold is a bubble merely because it has risen 6x is just plain ignorant. Gold has always shown that it is an asset that lies dormant for decades, only to experience the biggest moves in the shortest amount of time. There is no reason for me to believe that "this time is different." Gold has yet to do anything but trend upwards in a classic bull market formation. If and when the trajectory of the rise steepens, that will be the time to start thinking about getting out.

Expected Returns is a blog focused on gold investing.

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Arthur's picture

How do you hold physical gold in an IRA or a 401k?  Can it be done?

web bot's picture

You don't....

Welcome to the brave new world...

Snidley Whipsnae's picture

Here is a recent presentation given by Jim Rickards to military brass and the press. Pay particular attention to the second half of this video. Mr Rickards outlines how gold is plan B for the Fed and treasury and that the US is a superpower in gold (he assumes that the US has all the gold that is claimed). Mr Rickards states that the US will return to a gold standard with a currency backed 40% by gold and that gold will be about $5,000 - 7,000 per oz when this event occurs.

Mr Rickards in no 'gold bug' and has excellent his background at the site. Mr Rickards is paid by the US Gov to bring the military up to speed on matters of macro economics. The title of the talk is "Rethinking The Future International Security Environment" and is quite long but well worth your time to listen to. The first part is a summation of where we are, how we got here, the fiat currency relations, central banks, etc...the second part is about gold and it's future as backing for a US currency.

web bot's picture

This is a first class presentation. Thanks for posting it.

Now... can you please provide for my daily fix of Nigel Farange  lol

thecoloredsky's picture

I've watched this twice and it's not what I want to hear. But, it makes perfect sense and when I read this guest post it completely contradicts and even at times completely misses the point in Rickards lecture. I will echo Snidley and say spend the time to listen to the video, it's actually a fantastic speech that combines sentiment from ZH to CNBC and explains in detail what will happen regardless of politics.

When I explained to a co-worker that I was buying silver she asked, "Where are you storing it?" I replied, "At my home, where else?" She refuted that it would be a good idea to store it at the bank. First of all she thought I wasn't crazy for buying PM's but then she suggested that I store them in banks. Without even having to explain the situation she inheritly knows that PMs are stores of wealth, but she doesn't realize that when they aren't in your possession, they can be confiscated. Rickards in that video explains how the gold in safe deposit boxes were confiscated by the IRS and valued below the spot price ,making sure that the citizen who thought their gold was safe in banks, actually got a raw deal.

David99's picture

Pilbara faces cyclone risk December 30, 2010 - 2:23PM

A tropical depression over Australia could develop into a cyclone over the next few days and bear down on offshore oil and gas installations, and iron ore shipping zones, Australia's Bureau of Meteorology said today.

Gale-force winds may develop along the Pilbara coast in Western Australia by Saturday as the storm makes its way out to sea, though flooding was not expected due to the storm's steady movement, the bureau said in a warning notice.

BHP Billiton, Rio Tinto and Fortescue Metals export hundreds of millions of tonnes of iron ore mined annually from inland Pilbara deposits via coastal terminals at Port Hedland, Dampier and Cape Lambert.

Also Cockatoo Coal ceases operations as mine flooded

Be Careful with longs of miners

Matt's picture

I want to have physical gold and silver coins on hand for when TSHTF, however, I also want to trade physical PM in the short term to make dollars off the probable surge in prices, as my expenses at this time are all denominated in dollars, and I do not want to take delivery and then ship the bullion out on making sale, would a site like be a reasonable and reliable method of doing this, or is there a better option?

Advoc8tr's picture

Speculate with leveraged paper? CFD's, Stock options on miners etc... with trailing stops to lock in profits.  Pour the profits into physical metal (Take Possession!) . At some point I believe the paper price will crash to zero as the ponzi scheme collapses (100's of paper promises for each physical Oz) and the physical price will dislocate from the current paper instrument price. 

My Days Are Getting Fewer's picture


by optimator 
on Wed, 12/29/2010 - 18:25


Real estate can be simple, profit making, with no work and no overhead.  Here's a long term example.

250 acres of remote woodland purchased in 1963 for $10,000.  Taxes in '63 were $400, in 2010 $1500.  Value in 2010 $500,000.  It gets better.  Total dollars from Harvesting trees every ten years -- $110,000.  Not to forget special tax rates on forest land.




to digress from your digression, I have owned mixed woods timber of a similar acreage since 1999.  Paid $500 per acre and have similar real estate taxes.

Timber in the NE is cut on an 80 to 100 year rotation basis.  With timber prices at 40 year lows, no one with any quality trees is cutting anything other firewood or pulp - very low value material.

I have an extremely difficult time believing that anyone can generate that kind of gross income from timberland.  My property has considerable value, not because of the trees, but because of the close proximity to the ski hill.





Kreditanstalt's picture

The last phase of any bubble will be self-evident.  The bigger problem is ensuring that the proceeds of our gold sales are subsequently placed in the correct ~ upward-moving! ~ asset class...

Temporalist's picture

What a bunch of tools.  Even the Lind Waldock guy is soft.  As long as nitwits like Simon Hobbs try to suggest that someone promoting PMs is pushing an overinflated "investment" buy more.

And GSR "historically finds support around the 45 to 50 area" really?  I guess historically speaking, history began in 1980.

akak's picture

And GSR "historically finds support around the 45 to 50 area" really?  I guess historically speaking, history began in 1980.

So pathetically funny --- and appropriate!

The author of the original article above is guilty of a similar historical ignorance and bias.

Who is John Galt's picture

Ok OP. Let's see how that works out for you holding your FRNs.

A very weak and lame article.


thegr8whorebabylon's picture

time to take profits....before Blythe Masters and the Evil Empire do the metals smackdown in after hours.  (hat tip to the Turd)

  for the chorus;  "25 to fucking 1, my gamblin days are done.  I bet on a horse named a bottle of smoke, and my horse won."   you can replace 25 with 100 and horse with juniors miners.
bperkins2104's picture

The author is a little bit off with regards to his assessment of gold. He says that in 1969, gold was trading at $35 an ounce, down from $162 an ounce in 1869, arguing that this indicates that gold did not provide a hedge against inflation. Yet he failed to mention that the $35 per ounce price of gold was fixed by the US government. The real price of gold would have been much higher had its price not been fixed, and, in fact, foreign central banks could redeem their dollars for gold at $35 per ounce and sell the gold in their own countries at a much higher price on the open market. Moreover, I disagree with his assertion that real estate is the best inflation hedge. For one, real estate is by no means transportable, and can by no means be considered a liquid asset. In a hyperinflationary scenario, if things were to get so bad as to force people to leave the country in search of a safe haven, it's tough to imagine a scenario where there'd be demand for homeownership. In all likelihood, I highly doubt people who are worried about being able to feed their families on a day-to-day basis would be in the market to buy a home. Gold is valued on a global scale, unlike real estate, where demand is limited by geographical boundaries. Real estate is not homogeneous, either. Every house is different, whereas 1 ounce of gold is 1 ounce of gold, regardless of what part of the world you're in.

NonAggressionPrinciple's picture

spot on...and it kinda annoys me when people act as though prices are some mechanical input.  You have to look at the reasons why the gold price was low and part of that was massive central bank selling as someone earlier mentioned.  Also, psychologically,  demonizing gold I'm sure causes fewer buyers than there otherwise would be.

smalltown's picture

What source is the Author using to quote gold at $162 in 1869 (sorry if I missed this above)?   

I found this link showing gold stayed pretty steady for 200 years (1717 - 1913)



KickIce's picture

Good link.  And even so we devoped from a struggling nation to super power status holding the world reserve currency.

Also, as previously mentioned, gold's value was fixed.

Then came LBJ great society act but that's a whole 'nother discussion...

Beck gave a good object lesson on gold.  In 19xx this $20 (1 ounce) gold piece of $20 dollar bill could purchase 2 nice suits.

The gold piece can deliver the same today.  If that is not a hedge against inflation.

(And yes, I've given this example before - sorry for the rerun)



A Nanny Moose's picture

Umm...monetary regimes in the US have changed dramatically since 1869. Comparing gold prices then, to gold prices now is not apples to apples. No more greenbacks, bi-metalism vs. non-bimetalism, vs. gold Standard, vs. reserve currency status.

Will gold be worth $1500 next year, or $500? Who knows. I can tell you it won't be worth ZERO.

The Fonz's picture

I agree, when I think of maximum loss potential in silver I think of 50% as the max, something like 15 dollars an ounce and I consider that to be outlandish. That will only happen if I was catastrophically wrong in my reasoning.

I don't think I mentioned that I started buying gold because B of A took 16 transactions from a single weekend and reversed their order. My final transaction was overdrawn by 50 cents. By the time B of A had reversed the order of every purchase that weekend I owed them 16 bouncy check charges. They said they would forgive five, I did not pay them and cannot have a bank account. I began living on cash.Since I couldn't keep cash in my pocket starting buying gold with only the understanding that for some reason I was able to save it and pile it up where as I cared nothing for FRN. I understand the draw of gold as money :) I have been using it as money for about a year :)

I just wonder if the ETF's in the custodianship of JPM and HSBC in silver amounting to something like 60% of above ground reserves if they might just be accumulating it to control the change to a metal backed currency.

After all the price suppression scam works like this... pledge silver to get shares of ETF sell shares cheaply and drive price down, buy shares cheaply and swap them for hard assets. Thats accumulation with the appearance of price suppresion being th goal when in fact might not be. If they want fiat currencys to fail or know that they must fail they'll want to control the new money more than anything else.  If they have in hand 60 or 70% of the metals bought cheaply and the ability of people owning the ETFs to draw upon them is essentially just a promise they can break, how is it different than in past efforts to control the money supply to control the supply of money? 

Isn't the breaking of promises and fraud the cornerstone of our financial failure? Why should they honor the promise that will bring them the most power and wealth to break? They say that possesion is 9/10ths of the law, and in a collapsing society I am not so sure about that last 10th.

New World Chaos's picture

You get it.  SLV is a price suppression scam.

SLV has over 20 counterparties and you can be sure that, just like your BofA account, they will fail in the order that most benefits the oligarchs who will walk away with the real silver.  Besides that, SLV can own silver futures and silver futures can pay out in shares of SLV!  Isn't it great to pay your no-interest, no-limit Mastercard with your no-interest, no-limit Visa?  Oh, wait- you're one of the little people who can't afford your own congressmen and regulators?  Back to the plantation, debt slave!

Francis Dollarhyde's picture

Mine too, with the addition of ammo, shoot.

The Fonz's picture

I would like to thank everyone on this site for begining my in depth education in finance. My thanks to everyone here, even robo.  This is my first post.

I lost my job about two years ago and moved into a van, I couldn't figure out how it happned. I started in the usual places like Alex Jones, moved on to people like Noam Chomsky and finally ended up here. From here I began to develop an interest in monetary history.

 I cannot help but think of the movie "Secret of Oz" by Bill Still. I have thoughts and questions

1. In 1873 did the bankers want a gold standard to control the supply of money?

2. If they did, then they thought they could control the supply of money by controlling the supply of gold.

3. Who has the gold this time? Isn't it in massive ETFs owned by bankers who seem to want the fiat currency to fail?

4. If this is the case why should Gold be the best protector of wealth? If the end result is control of the velocity of money by massive ownership of real gold reserves what makes gold safe in the long term?

I have saved everything and put it into silver, I believe it will go up.. but don't we have to be ready to get right back out of it if the banks control it?

Thank you in advance, I hope these questions are not foolish.

AUD's picture


Whether there will be a market for gold in $ terms by the time you get your head around it all is a different matter though.

I like Doug Noland at too.

david3549tw's picture

The Fonz: in late 2002, i read an analysis of the macro economy down the road (ten years or more). among other things, they said that, according to their proprietory model, the price of gold would rise above $3000.  it was less than or around $300 then.  everything they forecasted in that analysis has come true so far.  so have faith and hold on to your silver like what i am doing. 

frugalman's picture

The Fonz: these are not dumb questions. Just asking these questions puts you in the 99th percentile of financial education literacy.  The banks are losing control of gold and silver.  Millions of people exchange real information on the internet now so we cannot all be force fed the lies that pass for the evening news.  The banks are losing control of gold and silver as we speak.  Hang onto your silver and keep accumulating as you can.

Mr Poopra's picture

This might sound hokey, but the destruction of my finances in this recession is what started my awakening as well.  Continue down the rabbit hole...what you will find will jar you, but you will never want to go any price.  

Vendetta's picture

the destruction of my finances and career in the previous recession was my awakening.  I studied a lot, went to the physical PMs and am never looking back till 'the system' resembles one of sanity.  Haven't seen even a glimpse of sane trade policy in 16 years and figure the whacked trade deficits won't be fixed till the currency is destroyed. There is zero political will to fix what ails America in either political party.

VeloSpade's picture

Headless hedge bitches.

FranSix's picture

There was also this from the Pragmatic Capitalist:

Kaiser Sousa's picture

this article courtesy of "Expected Returns" or

"I Be Expecting Dumb Mother Fuckers To Buy This Dumb Shit I Wrote"...

it was said above...there r only 2 forms of real money...Gold & Silver...period

FranSix's picture

The gold price of 1869 was after a market corner which bumped up the value of a 5-oz. gold coin (which was in circulation at the time) to up to 62% over spot.

A good indicator of how to look at the pricing of coin and allocated ETFs over their spot bullion value when gold would be presiding over its own inflationary peak.

USGrant's picture

<5-OZ gold coin>

A typo probably refering to the  the half eagle, a 5 dollar piece which contained .24 oz of gold. All gold pieces from 1 dollar to 20 dollars were legal tender but became scarce once Lincoln went off of the gold standard. That peak was corrected by going back to the gold standard in about 1870 which revalued an ounce of gold at $20 which was in essence the price from 1795 to 1933.

MrBoompi's picture

You shouldn't compare the housing bubble to gold.  The housing bubble was fueled by fraudulent lending and cheap credit.  This resulted in overvalued commercial and residential real estate.


Today, we also have fraudulent activity in the precious metals markets, but to SUPPRESS the prices.  It doesn't surprise me to find out China, who has been buying gold like crazy, may be behind some of JPMorgan's shorts.  (I'm not aware of fraudulent activity on the long side of the PM markets, unless it's in the ETFs.)


Also, gold and silver have traditionally held their value vs. inflated fiat currency.  What this poster sees as a bubble may just be a hollow reflection of a demolished US dollar.

ljag's picture

Xactly, pull


why IS this article on ZH since no self respecting participant would even dream of such nonsense much less post it. Gold is money. EOS

Geoff-UK's picture

The author is an ignorant slut.  No explanation necessary to anyone who can read a history book.

Pullmyfinger's picture

Why is this article on ZH?

penisouraus erecti's picture

Perhaps to give another view on the subject, and to reassure us gold bugs :-)

web bot's picture

The only bubble that I see is the hemorrhoid sticking out of your asshole.

I love idiots like you - who dredge up numbers from 150 years ago and talk about them in comparison to today as if we are looking at an apples to apples comparison. You conveniently exclude the hyperbolic growth in global GDP, supply and demand shifts via industrial consumption and population growth, along with the emergence of data symmetry via robot trading.

Buddy... gold and silver have not even started their hyperbolic movement. When the USD is unseated as the fiat currency of the world, you'll see precious metals become fiat because these will be the few forms of objective exchange that can be used for exchange and trade for approx. 18 to 24 months as the system resets.

We just have to go through that nasty period of hyperinflation, to destroy the value of the debt that is held by foreigners and that pesky thing of social unrest that we'll have to experience.


Mr Poopra's picture

You'd think these paid disinformation agents would have more sense than to waste precious time talking about gold bubbles on ZH.  Desperation is a stinky perfume.

rumblefish's picture

gold and silver are real money. end of story. all your data is in terms of FRN which are becoming more worthless by the minute.

Silversinner's picture

Central bank of America prints money like

crazy mad dogs at a rate of $400 per month per ounce

of gold.WTF are you calling a bubble.Gold

has just started it's bull market and will stop

when a real big portion of the money suply is

coverd again.Rest of gouverments print like

creazy too.Gold is money as an asset,the

rest is just a paper claim;a liability.In a wold

were a lot of promisis will be broken it is

real wise to own gold.Gold was and will be

the most trusted currency and money in

international trade.No matter how fast

the lie is,truth will eventually play catch up.

gold is real money,paper only usefull as

currency for short periods of time and

always ends in disaster.Putting my labour

in gold and silver and feel real glad I did.

Altough it was fin a good thing to do,it's

more of a political choise.I just do not

trust no one in banking and financial wold.

Just use them for some transactions but not

let them savekeep my wealth EVER!!!!!!!!!

I am happy a sidesteped the confiscation



mark mchugh's picture

Keep assuming the US Dollar is a constant, and I'm sure you'll be just fine.....

Mercury's picture

I agree that real estate is a great  inflation hedge, the problem is there is a cost of carry involved which may not always be able to be married up nicely with an income stream from same.  Notice how, as muni governments start to panic here with their liabilities, property taxes are generally going UP into falling RE market values.  Also, if/when things get really dodgy remember that your RE wealth is dependant upon property rights and the minimal infringement thereof.