I try to keep the opinion pieces to a minimum here, and leave the final decision to readers, but the question of gold and silver prices has been coming up a lot lately, and I thought I’d do a post on the subject.
Almost one and a half year ago I did a post in which I said that it looks like gold is where the next bubble is, but it’s too early to call it a bubble yet. I have personally stayed away from gold all this time, and although I was initially interested in it, looking at all the other retail interest scared me away.
One of the rules I go by is that if everyone is interested in something, then it’s best to stay away from it – I feel that it’s only a matter of time that the thing will see leverage and speculative interest build.
To that extent, the presence of retail interest in stocks or oil or gold or whatever itself is a contrarian indicator. Since there is not much leverage built yet, and a lot of people are calling a gold bubble – you may say that it proves that gold is not a bubble, and that may well be.
However, keep in mind that asset mis-pricing happens all the time. You don’t really need for gold to get to a tulip mania style bubble for a big crash; just go back a little bit in time and think about how oil prices ran away. At $147 a barrel, oil was never called a bubble, but was it mis-priced towards the higher side? I think history shows us that it was. At that time, it was very common to hear that China and India were driving oil prices due to their demand but when the barrel dipped below $40 no one talked about China and India driving demand anymore. In fact I did a piece on that about two years ago titled: Are China and India really driving oil prices? in which I said that in the short run oil prices may not come down, but in a longer time frame, they will come down to reflect the underlying real asset value, and though I don’t know what underlying value gold has – my personal opinion remains the same. Something will happen which will prick all this excitement around gold and silver, and the prices will come down to match more sane levels.
I probably don’t need to repeat this to regular readers, but it’s my duty to remind you that you shouldn’t take investment advice from random bloggers on the internet – your’s truly included.