Is gold in a bubble now?

For as long as there have been financial markets, there have been bubbles. They are a necessary component of capitalism that occur in every sector across every market. A bubble is essentially a situation when prices become overinflated for reasons that have nothing to do with the fundamentals of the asset. The most notorious of bubbles was the tulip mania, when Dutch tulip bulbs sold for as much as 10 the average annual income… and then fell as quickly as they rose. Is Gold reaching bubble status? Here are a few points to consider:

The Long Rise
Gold has been posting annual gains for the past 11 years in a row, and some investors believe the prices have become overinflated. When assets rise for many years in a row, it creates an unnatural expectation that they will always continue to go up. The general consensus among professional investors is that gold will rise to over $2,000 in 2012. And that’s the second point:

Conventional Wisdom
The majority of investors believe gold will continue to go up, which is the prefect condition for a strong collapse. With most investors buying as much as they can, the market quickly runs out of new funds, and a small dip in prices can turn into a major drop. Time and time again, conventional wisdom has proven to be a good indicator of what will NOT happen.

The Guru
There are a few investors who seem to have an uncanny pulse of the market and are right much more than they are wrong. Warren Buffet comes to mind, as does Eddie Lampert. And just several weeks ago, another one of these investors, the infamous billionaire investor George Soros, said that believes thatGold prices are ready to decline in 2012 and beyond. In fact, he has personally sold the majority of his gold holdings in anticipation of an impending bear market.

The interesting thing about bubbles is that they are almost impossible to spot ahead of time. In retrospect, bubbles seem so obvious that you wonder how you missed them (tech bubble of ’00, real estate bubble of ’06, etc.). But as they are happening, greed usually takes over and clouds one’s better judgement. You see others making money as the prices rise, and you want to jump in and join them. So while no one can with certainty if gold is in fact in a bubble there are indicators that this may be the case, and investors would be wise to monitor their positions with caution over the coming year.

Source: EzineArticles

Tags: Gold analysis, gold forecast, Gold future prices, Gold futures, Gold investment, Gold news, Gold price, gold price 2012, gold price forecast, Gold prices, price of gold, Spot gold, Spot gold price

Posted by admin on Jan 11 2012. Filed under Gold predictions. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry