Two Government-Sponsored Asset Bubbles--PART I

First on my list of large, government-sponsored bubbles is the gold + silver bubble. Escalating precious metals' prices has been going on for over a decade now. Gold was the best performer in the lost decade we just had in the stock market. Now it has become a full-blown epidemic. The Chinese and Indian governments keep buying more gold for their foreign currency reserves, further moving (artificially) the prices up.

A decade of positive performance has made retail and institutional investors addicted to the price
increases in this sector. Very smart money like hedge-funder John Paulson is STILL bullish on an obvious bubble (maybe he has a secret short position). And at the same time George Soros is quickly dumping gold and silver.

Take a look at the chart below. This is the dot-com bubble poster-child: the NASDAQ.  The investor who got in at the beginning (around 1997) saw the index climb in one year from just over 1,000 to close to 2,000 in mid-1998. That's about a 100% return. But the bubble persisted. The investor getting in in mid-1998 (or even as late as early 1999) went from about 2,000 to 3,000 by the end of 1999. This would be about a 50% return. Wow, that's great! But, wait, is it too late? Don't fret. If you got in at the beginning of the year 2000 you would have seen the index move from 3,000 to over 5,000 in not even six months! That's a gain of about 67 percent.

This is the theory of the greater fool. As long as someone else is willing to buy an investment at a greater price than the last fool bought-in at then the asset bubble continues to expand. It doesn't matter if the buyer is a government or a hedge fund manager or a regular investor. This Greater Fool behavior perpetuates itself with increasing returns....

For the ending to this story just look at the chart again. Notice the price level of the NASDAQ at around the year 2002-2003. It goes to the depths not seen since the beginning of the bubble. Gold investors will NOT BE SO LUCKY. Gold has stayed flat for two or more decades in the past. And there is no reason it won't again.

There is no industrial use for it. It costs money to store, transport and insure. It produces no income. It has no earnings-growth potential like the stock market. Gold is now much easier traded and shorted than in the past. When everyone jumps off the bandwagon at once AND the smart money shorts the metal then the downward volatility can be even uglier than the past drops. There's a lot going against the FUNDAMENTALS of gold.

With all investing the individual must arm himself with information. Look at this free book summary about other crazy bubbles from the past for an historical perspective on speculation:  VBS-ExtraordinaryPopularDelusions. (This Visual Book Summary is compliments of MillionaireFreePress.com)

This is not the first irrational bubble to happen. And it won't be the last.

Dot-Com Price Run-Up: Would anyone care for a repeat of the losses?