The price of gold is falling. Everyone seems surprised. John Paulson is selling his fancy house in Aspen. I don’t get it. Or maybe I do.
I’ve been on record for a long time saying that gold was overvalued. And for a long time, the price kept going up. Was I wrong? Am I right? The answer to both questions is, sort of but not really, which sounds like a weasely answer but isn’t.
Markets are not perfectly efficient, but they tend toward efficiency in the long run. This means that there can be long periods when prices are not efficient. There was no real reason for gold to go up in price, but it was going up, and many people were playing that momentum. Others bought out of fear. And at some point, people realized that there was no reason for the price of gold to be so high, and so the prices started coming back down. A lot of money is made and lost in the meantime.
My clue to the peak or trough is when people who are not financial people start to argue with me about valuation. For example, when people start to talk about gold prices from a political perspective rather than fundamental values, that’s a sign that it’s overvalued. Unfortunately, it isn’t information to trade on, because it can take a long time for reality to set in. You don’t make money by not buying gold – you make it by selling it into the rise if you are long. (It’s difficult to short into a bubble because it can take forever to play out.) You make money by not buying gold and putting the money into something that is undervalued.
It’s not very sexy, is it?
