Gold Is a Bubble: Resist Its Charms

Source: Money (1/10/11)

"A boom becomes a bubble when pop culture starts paying attention."

Can you tell when a boom has turned into a bubble? One clue: When pop culture starts paying attention. The housing bubble, for example, brought both the TV show Flip This House and a rival on another network, Flip That House.

So if you own a lot of gold, you might regard a recent episode of Saturday Night Live as your first warning. In the opening skit, Bill Hader as China's President Hu Jintao declares that Glenn Beck was right and that "my government should have bought gold. Unfortunately, all our assets were tied up in U.S. Treasury bills."

Back in the real world, gold is trading at about $1,400 an ounce, up from less than $500 five years ago. That's a 23% annualized return, far outstripping the gains on stocks (1.1%) or bonds (6.1%). Fear is driving a lot of the rise.

In the aftermath of the bursting of two historic bubbles—dotcom stocks a decade ago and then real estate—many investors long for something that seems to have a timeless, intrinsic value. (Never mind that five years ago the market thought gold was intrinsically worth 65% less.)

You may be wondering whether you should be getting a piece of this action. This time last year, Money argued that although gold prices could continue to climb in the short run, the case for gold as an investment no longer made sense.

And that leads to another truth about bubbles: You'll almost never look smart trying to call them, at least at the outset. The real estate bubble was six years in the making; the dotcom bubble lasted five years before bursting.

The gold bubble could stay pumped up for a while. But that doesn't make gold less speculative and risky than it was a year ago.

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