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People always ask me if they should buy gold. I always tell them it’s overvalued, but I’ve been saying that for years. Gold keeps going up in price for no good reason. That’s how bubbles are. It may be obvious that an asset (Beanie Babies, tech stocks, residential real estate) is overvalued, but the price can keep going up for a long time before the market wises up, and in the meantime, a lot of money can be made.

Gold buyers are assuming one of three different things. One is that we’re heading into a period of severe inflation. The second is that the world financial markets are so stressed that paper money – or at least dollars – will be worthless. The third is that gold is going up in price, so why not get in on the fun?

I don’t understand the inflation argument at all. Prices are flat, flat, flat. Sure, you may pay more at the grocery store, but what has happened to the price of your house? The price of your labor? Interest rates are near zero, which is why your bank has tacked on fees instead of paying you interest. The US and Europe have excess capacity, causing weak economic growth in emerging markets that rely on the developed world for their markets. The risk is deflation, not inflation; inflation that would justify buying gold today at $1200 an ounce is remote – let alone at the $1700 it was trading a few years back.

Then you have the total financial collapse scenerio. If you believe that, you certainly shouldn’t buy gold in paper form (mining stocks, ETFs, futures) because if paper money is worthless, securities will be worthless, too. You’d want your gold in tradeable forms, like coins and jewelry, and you’d want to keep it at home and not in a bank vault. (Do you think your bank will let you walk in if the world economy collapses?) Even better than gold would be dried food, bottled water, batteries, blankets, and antibiotics. If the US dollar becomes worthless, we will be facing some really serious problems. Really serious. I’d rather have a stock of batteries that can be traded for gold if needed.

The third argument is classic bubble behavior. The problem with bubbles is that no one knows when they will blow up. A lot of money can be made between the time that people identify the excess valuation and when prices fall back to reality. It may be happening now with bitcoin, where excitement over the payment system is getting all mixed up with excitement over the currency. Or maybe we’re just bored?