Price bubbles usually take different paths when they
Some of them such as the Dutch Tulip Bulb Mania were built
strictly on speculation, the .com bubble was built on the
expectation of new, game-changing, technologies and productivity,
and other bubbles, such as the recent housing bubble, were built on
easy money and economic policies.
Regardless the reasons for their formations, all bubbles have
the exact same ending, a quick reversal and rush for the exits when
the inevitable party ends. Fear is much stronger than greed,
and it shows as bubbles form and then ultimately pop much
And, although we may not always know in real-time exactly when
we are in bubbles, the fact that they all end the exact same way is
useful information we can use when looking at the next bubble that
is popping. That bubble is Gold.
Tracking Gold Sentiment
Gold's bubble is not much different than all the others.
Justifications and reasons to buy gold are very easy to find, and
just like a few of the previous asset bubbles in history. The
reasons stem from easy money policies, a fear of never-ending
inflation, etc. But there is a problem with that analysis.
Inflation is not occurring and the U.S. dollar is stronger
today than it was in 2008. Unfortunately, gold
bulls like to focus on what they want to hear versus paying
attention to the relevant facts.
If you follow our work, you know we have been on top of the Gold
bubble and pop. (See our recent articles "
A Gold Forecast that Will Shock the World
" and "
Ignore the Gold Experts
" along with our #GreatGoldCrash2013 Tweets.)
ETF Profit Strategy Newsletter
released when gold was still trading near $1600 an ounce, we said:
"The peak in pop culture's obsession with gold occurred right
around the time that gold prices peaked at $1900 in late '11.
We don't see it as a coincidence that Pawn Stars was the 2nd
highest rated television show in '11 just as another popular gold
focused television show was in its inaugural season, right when
gold prices topped out. There were even "sell your gold"
kiosks popping up in malls across America".
Along with some other reasons we outlined, it was clear that
sentiment in gold was at a bullish extreme and helping point to a
bubble in the precious metals.
Gold's Price Confirmed it was in a Bubble
Price wasn't helping gold's case either as we
again explained in our
Profit Strategy Newsletter
"Another concern we have for precious metals is the fact they
have been one of the only groups of commodities that have
continued to rally beyond their 2008 price highs. If the
reason to own precious metals is to hedge inflation, I would
expect hedges to fall into other commodities and real assets such
as agriculture, energy, and industrial metals. And that
simply has not occurred".
Since then, buying agricultural (NYSEARCA:DBA), energy
(NSEARCA:DBO), or even industrial metals (NYSEARCA:DBB) was a
better way to go than owning the precious metals.
The chart below shows the relative outperformance through June
of those suggested assets versus gold (NYSEARCA:GLD) since that
article for subscribers was published April 19. All three of these
alternatives have significantly outperformed their gold
Where to From Here?
If history is any guide and the precious metals are in a
deflating bubble, it's likely gold and silver have further to
fall. For starters, gold's bubble likely started when its
price made new highs above 2008's, when it left most of the other
commodities in the dust.
If the reason to own gold is for an inflation hedge, then most
other commodities should fit this bill as well, so it would make
sense they should perform similarly, and they simply
By late 2009 the precious metals (NYSEARCA:IAU) made new highs
while most of the other commodities remained well below their 2008
peaks in price. This leads me to believe that gold and silver
(NYSEARCA:USLV) will need to pullback to at least those levels to
relieve the bubble that was built the three years leading up to the
The easiest way to see this is through a chart of all the
commodities. This final chart was one included in our May
Newsletter when Precious Metals were up over 49% since 2008.
I have updated it through June. Today precious metals are
still up 29% since the 2008 lows, and still well ahead of most
other commodities (livestock is the one outlier).
This means the bubble could have more room to deflate.
A price of $1,000 would not be unreasonable in such a
scenario. With most other commodities still down in price
from 2008, it isn't crazy to think that the precious metals should
also return to similar levels. A fall back to $1,000 would
put gold back at 2009 levels.
Silver (NYSEARCA:AGQ) is in a little better situation, having
already fallen back to 2008 and 2009 levels. However, for silver
and gold to get back to the 2008 price equivalents of most other
commodities, they would still need to fall around 30% from current
levels as the chart above suggests.
The ETF Profit Strategy Newsletter uses common sense, sentiment,
and technical analysis to stay ahead of the gold bubble as well as
other prevailing market trends. Also included is our twice
weekly Technical Forecast which keeps abreast of the shorter-term
trends in the stock, bond, currency, and commodity markets.
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