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Message: From The Other Side .. Is GOLD in a Bubble? Says Ian below..."No Way!"
After the Internet bubble of the late 1990s and the real estate bubble that raged from 2000 to 2007, many market observers are quick to call a bubble whenever a specific asset class experiences a significant rise in price.
For investors already in gold, or those considering adding exposure to gold, they must first answer the question, "Is gold in a bubble?"
***To answer this question, let's define what creates a bubble. Simply put, bubbles are the result of too much investment in a specific asset class. This occurs for a number of reasons, including as a result of financial innovation, such as the creation of sub-prime mortgages during the housing boom. It is also fueled by investor exuberance, such as during the dot com boom when many investors were beaming with joy over the ownership of money losing Internet stocks. And it reaches its peak when speculators use large amounts of leverage in an effort to maximize their gains, as we saw in the real estate boom with zero money down loans and speculators flipping properties for a quick buck.
Investors must look at gold through a similar lens.
Is there currently a mania in gold, like there was with Internet stocks or real estate? There is not. There are many investors and commentators who are bearish on gold and believe the asset's rise can't continue. Conversely, while there are certainly many people who are bullish on gold, it's far from a consensus opinion.
Is there investor exuberance? There is not. Gold remains largely under-owned by investors as a whole. Many investors have no ownership of gold through stocks, ETFs, or mutual funds. Those who have some ownership typically hold a very small amount. How many people have more than five-percent of their portfolio invested in gold? The answer is very, very few.
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**Eric Sprott of Sprott Money Management recently published some great research that aims to show the low level of investment in gold. In the Gold Yearbook 2010, the CPM Group reported that in 1968, gold represented five percent of global financial assets held by individuals for investment purposes. That percentage steadily decreased from the late 1960s and bottomed in 2000. The decline was largely caused by rising values of stock and bond markets around the world, with the amount of gold held for investment purposes increasing at much slower pace. Only in recent years has there been a rise in gold ownership for investment purposes. Sprott argues that a large increase in recent years reflects the rise in the price of gold, rather than capital inflows from investors who have been buying gold. In fact, he says that of the increase from 0.2 percent in 2000 to 0.7 percent in 2010, only 0.1 percent of this increase, or the equivalent of $250 billion, was from new investment.
When compared with the $98 trillion of new capital invested in global financial markets during the same decade, the amount invested in gold is comparatively trivial.
These numbers demonstrate that the average individual investor has not participated in the bull market for gold. While the media reports the latest moves in the daily price of gold, most individuals have been sitting on the sidelines.
If this were a gold bubble, the average investor would hold a healthy dose of gold through ETFs or even gold bullion. The advent of the ETF makes it possible for investors to buy a stake in gold just as easily as buying a stock through their online broker. Meanwhile, the Internet has made it easy for individuals to buy gold bullion in the form of coins or bars with relative ease. In spite of how easy it is for individuals to invest in gold today, few have done so.
***Another telltale sign of bubbles is rapid price appreciation. While gold's rise over the last decade is now approaching five hundred percent, the rise has not been dramatic in short periods of time. On the contrary, the rise in the price of gold has been slow and steady, much like the rise of stocks from 1980 to 2000.
Good investing,
Ian Wyatt Chief Investment Strategist Wyatt Investment Research |
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