Be cautious, gold is a classic bubble

Have you ever come across an old photo of yourself—if you are old enough, from the seventies—and felt aghast at the way you were dressed? Did we actually wear high-waisted, flared trousers, sometimes with safari suits?

Have you ever come across an old photo of yourself—if you are old enough, from the seventies—and felt aghast at the way you were dressed? Did we actually wear high-waisted, flared trousers, sometimes with safari suits? Didn’t we realise how stupid we looked? Apparently, we didn’t. It was the fashion. My hunch is that once the current fashion for investing in gold wears off, we’re going to feel the same about it as we do about flared trousers. Did we actually buy gold at $1800 an ounce?

HT Image

Did we really not realise how stupid that was? Apparently, no. A day will come when you will wonder how you ever believed that this was a justifiable price for gold, but that day isn’t here yet. It’s the same with every bubble.

It’s supposedly okay to buy more and more gold at higher prices because, didn’t you know, gold is to be bought as a shelter against bad times. Never mind that this logic has nothing to do with the way financial markets are organised today. The original idea of gold as a shelter asset was that gold would be useful when people’s belief in the issuers of financial assets weakened. It wasn’t meant to be a hedge against volatile stock markets. The idea was (and I do mean ‘was’) that gold was a portable store of wealth.