With Fear Diminishing Gold Bubble Preparing to Burst

The gold bubble is preparing to burst. Investors have endured panic for three years, and gold has rightfully gone up. Unfortunately for current gold investors, [however,] fear/panic is diminishing by the day and without that essential element, the big money will exit the trade…Those left carrying gold in their portfolios will be trying to come up with reasons to justify their holdings… [and there is considerable] confusion of rationale to [support] the precious metal’s continued rise. Words: 606

So says Jason Schwarz (www.thestreet.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted into edited […] excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Schwarz goes on to say:

The Supposed Sound Reasons For Gold’s New Highs                          

a) Because of fear of a double dip
b) Because of quantitative easing
c) Because of the euro collapse
d) Because of the first dip
e) Because of expectations for future inflation
f) Because of investor speculation
g) Because there has been a truly fundamental change in society

The Real Story Behind the Gold Bubble

There have been four groups who have participated in this run-up:

Group 1 (November 2007 – April 2009):
Hedge funds who were worried the global financial system would crumble as a result of the mark-to-market banking regulatory requirements.

Group 2 (October 2009 – April 2010):
Hedge funds who were worried that unprecedented stimulus would result in hyperinflation as global economies recovered.

Group 3 (May 2010 – July 2010):
Hedge funds who were worried that the eurozone would collapse, thereby causing currency chaos.

Group 4 (August 2010 – ???):
Individual investors who are now buying gold for the first time because they want in on the action.

Before the financial crisis, in January 2007, gold was priced at $650/ounce and the average price of gold had fluctuated between $300 and $500 during the 10 years before. As the financial crisis unfolded, gold served as the ultimate investment vehicle to profit from fear because of its unique characteristics: it isn’t valued on fundamentals, it generates no earnings, it pays no interest, it is essentially a perpetual zero-coupon bond that is easy to manipulate into a snowball effect. This ambiguity made the asset a prime profit-generating allocation during times of uncertainty.

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Unfortunately for current gold investors, fear/panic is diminishing by the day. Without that essential element, the big money will exit the trade. September’s strong stock market performance was the beginning of a new stage — a stage that I refer to as a “sigh of relief.”

Conclusion
Investors have endured panic for three years, and gold has rightfully gone up. Now that the cataclysmic panic is subsiding those left carrying gold in their portfolios are trying to come up with reasons to justify the holding. Quantitative easing is a tough sell. Slow growth isn’t enough. The time looks ripe for the investment vehicle of fear to break down.

Gold approaching $1,400 an ounce is eerily similar to oil at $140. Remember all the credible firms extrapolating the speculative action into $200 oil forecasts. Those same bubble-builders are now calling for $2,000-an-ounce gold.

[Don’t get left behind holding gold!]

*http://www.thestreet.com/story/10882569/1/the-gold-bubble-is-about-to-burst.html

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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