Talk of Gold Bubble Grows

As the price of gold has soared over the last few weeks, debate in the financial community has increased over whether the metal is exhibiting the signs of a bubble.

“We think the current price of gold is a bubble that is poised to burst,” said an Aug. 15 report from Wells Fargo Private Bank. The report also noted that gold has “little intrinsic value,” other than its jewelry uses, and a history of volatility.

“With very little warning, the bottom can drop out on gold prices very quickly,” the report warned. “For example, during six short months in 2008, gold lost more than 30 percent of its value. In the 1980s, in a little more than two years, the price of gold dropped approximately 65 percent.”

Lloyd Thomas, professor of economics at Kansas State University in Manhattan, Kan., also foresees a crash, noting that gold is approaching its 1980 high point.

“If you adjusted the price for inflation that would put gold at $2,100, and we are getting close to that,” he tells JCK. “In 1980, it was clearly a bubble, because it took 15 years to get back to that level.”

He notes that traders view gold as a hedge against inflation—but doesn’t think inflation will get much traction it the future.

“When people see the economy is going to be okay, if it is going to be okay, they will start selling things like gold and putting their money back into the market,” he says.

But right now, he says, gold’s rise has fueled by “herd behavior.”

“You saw this with the NASDAQ in the 1990s, or the housing bubble from 1998 to 2006,” he says. “When people see something that is creating gigantic returns, they jump on it, and that creates a bubble, and bubbles always burst. The question is when. It could be next week, next year, no one knows.”

“Gold may go up to $3,000, but I think eventually it will go down sharply,” he says. “Sometimes on the downside, you get over-shooting too.”

Matt Zeman, market strategist for Kingsview Financial in Chicago, is not as pessimistic about gold’s future, but does think that the metal’s futures are currently “overbought.”

“I wouldn’t be surprised to see $100 or $200 shaved off the price,” he says. “Every time you turn on a financial program you see people talking about gold. It gets unknown investors to jump on the bandwagon because people are looking for anything that is moving right now. The market looks to me a lot like silver looked several months ago, when it was rising with impunity. And once it sucked in every last institutional investor, you saw a huge correction.”

Still, he remains bullish about gold, because of nervousness about the world economy.

And another Wells Fargo analyst dismisses the bubble talk. 

“A lot of people think that any rapid increase in prices is a bubble,” says Scott Anderson, a senior economist with Wells Fargo Securities in Minneapolis. “There are some solid reasons behind the move in gold. There is a weaker U.S. dollar. We are dealing with inflation fears. Until some of those fundamental factors resolve themselves, I think gold will continue to do well.”

He notes that while many have expressed astonishment at gold’s rapid rise, its 200 percent rise in five years is nothing compared to the gains in the oil price, which rose 340 percent over a similar period.

For now, most financial institutions think gold will keep rising, with many leading banks recently revising their forecasts upwards.

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