Early Retirement Blog

Two years ago, when gold was $800 an ounce, I wrote an article “Is Gold in Your Retirement Portfolio?“, here on the Early Retirement Blog.

I mentioned that “Gold tends to perform well, when there are global political and financial crises, and retirement investors should consider including gold as part of their retirement portfolio.”

Gold is at $1,200 an ounce, a 50% gain from when I wrote the gold article, and now I’m writing to warn you about a possible Gold Bubble.   Why?

Two reasons why we may be in a gold bubble.

1) Everybody is talking about gold.   Financial experts on CNBC who missed the housing bubble are recommending people buy gold. Annoying Gold commercials on T.V. have   replaced the annoying FICO ads of the real estate bubble era.   Clear sign of a bubble.

2) Their is 80 times more paper gold in circulation than their is real physical gold.   For comparison, before the housing bubble crash, banks were leveraging their real estate 30 times.   A lot of gold speculation taking place.   Another clear sign of a bubble.   If gold prices reverse, and the speculators decide to unload their paper gold, gold prices will experience a severe crash.

Gold is simply a commodity.   Like what happened with oil a couple of years ago, prices can be easily manipulated, by large investment firms such as Goldman Sachs, J.P. Morgan, and their hedge fund subsidiaries.    They can take the price up and down on a whim.   It’s how the large investment banks make their money these days – currency and commodity speculation – pump and dump.

The large Wall Street investment banks and hedge funds, have at their disposal, the mainstream media to spread stories in an effort to drive prices.   Right now, the story being told and sold, is of a collapsing Euro and dollar.   And according to “financial experts“, paid shills for Wall Street, the safest way to protect yourself is to buy gold.

Financial experts are predicting Gold prices of $2,000, $3,000, $5,000 an ounce.   Wall Street speculators are once again, taking advantage of investor fear and greed, in order to drive up prices before they dump their paper gold.   I smell a bubble.

On the other hand, Max Keiser makes a good case, for why gold could go much higher.   Besides being a hedge against inflation, and political uncertainty, gold also protects you against deflation, acting as a store of value.   As overvalued real estate, stocks and bonds lose their value, gold can rise in relative value without the price of gold going up.   It’s a good argument.

In any case, whether there is a gold bubble or gold is headed higher, remember that you should not be speculating with your retirement savings, in gold or anything else.   Be aware that their are lots of rip-off artists getting involved in the gold mania, advertising to buy your gold at heavy discount, and willing to sell you gold at a very high premium.

Stick to a proper asset allocation model, which will give you good asset diversification, and do not chase the latest hottest investment. I do not own gold.

Update: July 1, 2010
Gold plunged $40 an ounce today, three weeks after I wrote this Gold Bubble Warning article, have gold prices peaked?   I don’t know.  But I can explain why gold dropped – G20.   At the G20 meeting in Toronto, Europe declared that it was going to adopt austerity, in order to defend the Euro.

Much of the rise in the price of Gold came at the expense of the Euro.   Worried investors had been moving their assets out of the Euro and into Gold.   With Europe’s announcement that they would be defending the Euro, speculators who had been shorting the Euro and going long gold got caught in a squeeze, and were forced to bail out of their positions.

Update: February 26, 2011
Gold is at $1400 an ounce.  Although it has risen in value since the last update ($200), it has not gained very much in the last 6 months, considering all the political and financial upheaval we have witnessed.   I would like to share an interesting article, written by fellow financial blogger Ron Robins, which gives a good history of how gold has been used as currency.  Worth reading.

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Easy Asset Allocation
Early Retirement Planning