Is The Gold Bubble Bursting?

Sep 26, 2011
Shannon Webster

1 kg Gold bar - By Swiss Banker [Public domain], via Wikimedia Com

The price of gold has gone up to record levels since fall of 2008. Now those prices seem to be falling.

We've seen the commercials on television, telling us that gold is a safe investment. We've seen people talk about selling their gold for cash, how their investment portfolios have increased thanks to gold. Even the news for the past three years had almost nightly statements saying gold reached a new record high price. That is, until about two weeks ago, when the prices slowly started to come back down. Is the gold bubble about to burst?

A bubble is a over-valuation of a product or service. It occurs when people pay higher prices for an item, believing it will continue to increase in value. When prices continue to rise, it begins pricing people out on the investment, and people decide to cash out. The more people who attempt to cash out, the more the price drops. Panic usually sets in, with holders trying to sell their product before they lose money. For the last people into the market, the losses begin earlier than for those who bought at the start of the bubble.

Bubbles like this occurred in 2000 with tech stocks, and again in 2008 with mortgage-based securities. The logical response for investors was to put their money into gold, a tangible product that always carries a value to society. With the flood of investors, gold prices went from $874.20 per Troy ounce on September 30, 2008 to a record high of just over $1,900 in mid September 2011. As of September 25, 2011, gold had a price of $1,638 per Troy ounce (http://www.suntimes.com/business/savage/7869461-452/gold-prices-down-but-not-out.html).

These loses have already hurt people who purchased gold on margin, or who bought into the market when the price was higher than $1,638. These people have already lost money on their investment, and the longer they hold onto gold, if the downward trend continues, they will lose even more money. For the people who held gold prior to September 2008, those who sold their holdings when the price was at it's record high of $1,900, they have seen profits of over $1,000 per Troy ounce they held. They have made significant money on the market.

Is the price of gold correcting to a more realistic valuation after years of a market many investors wanted a part of? Or is this a natural cyclical decline before an increase, perhaps over $2,000 an ounce in coming months. A similar pattern took place with prices raising significantly in tech stocks in the 1990s, with a minor correction turning into an overnight burst. The mortgage bubble had a similar pattern in 2008. Oil saw the same thing happen in 2009, with a barrel reaching well over $100 before coming back down. These signs are alarming for investors who have large portions of their holdings in precious metals.

Analysts have said that even if the market undergoes a price correction for gold and other precious metals, it is only a correction, not a bubble bursting or a worry to investors. These analysts are also paid by the brokerage houses that make profits buying and selling gold for investors. The signs are appearing that gold is the latest in a history of bubbles, and that it will end up breaking.

If the gold bubble does burst, with so much uncertainty in the stock market and in Europe, that would indicate there are no more so-called "safe" investments left for investors. This uncertainty could show itself though another round of market declines, which we've experienced from time to time since 2008. The lack of a safe investment may turn even more people away from Wall Street, making the economic problems even worse, as America has turned to a finance based economy in the past 40 years. Investor panic may take place, further depressing the economy and hindering recovery for the working class.

This is not to say that gold is not a safe investment for the future. It just means that if you're looking for a quick dollar made, gold may not be the right market for you. Gold has value through history, and will continue to have value into the future. The prices we're seeing today are heavily inflated and are about to come back down to normal levels. If you're investing for the long term, gold may be right for you. If you're trying to make a quick score on the markets, find another option that isn't overvalued in the current market.