by Charles Sizemore | September 20, 2011 6:00 am
World stock markets are down on renewed worries of a Greek default. Adding fuel to the fire, President Barack Obama’s proposal to levy a new tax on millionaires — dubbed the “Buffett Rule” after it was suggested by billionaire superinvestor Warren Buffett — has drawn a sharp rebuke from Congressional Republicans and threatens to unleash more political instability on a crisis-weary public. And U.S. homebuilders, citing the effects of never-ending foreclosures, are even more despondent than feared, according to the latest edition of the National Association of Home Builders/Wells Fargo Housing Market Index, which was released on Monday.
With the finance world appearing to teeter on the edge of disaster, one might expect that standby crisis hedge — gold — to rise.
Yet a funny thing happened. The price of gold actually fell sharply.
The spot price of gold has continued to drift lower after surging to new, all-time highs above $1,900. As this article is being written, the price has fallen to $1,778 and appears to have lost all momentum.
Gold’s recent weakness comes even as competing crisis hedges have lost their luster. The Swiss National Bank took a sledgehammer to the Swiss franc two weeks ago, pledging to lower its value against the euro. The tactic worked, sending the franc down nearly 10%. U.S. Treasuries — considered by many to be the ultimate safe haven for their liquidity — now yield far too little to be attractive for most investors. The 10-year T-Note yields a miniscule 1.95%.
Gold’s recent action should be deeply disturbing to gold bugs or to anyone using gold as a refuge from the market’s volatility.
While I hesitate to definitely say the gold bubble has burst (the market gods tend to punish those who would be so vain), it is becoming increasingly likely that this is the case. You can never say with certainty until after the fact, but the anecdotal evidence suggests the peak — if we haven’t seen it already — is near. Let’s take a look at a few indications that that’s the case:
While Mr. Trump has made billions as a property developer, he also has a habit of putting his foot in his rather large mouth. It would only be appropriate if this blustery political rant marked the top of the bubble. Add Trump’s little publicity stunt to the “bear” column for gold.
The gold bubble appears to have sprung a small leak. It could still be patched, of course, and we could see the bubble expand a little more before it pops. But given gold’s recent lackluster performance in the face of continued crisis, I wouldn’t bet on it. Once the bubble begins to deflate in earnest, the gold bugs are not likely to fare any better than Miami condo speculators or dot-com true believers.
Charles Lewis Sizemore, CFA is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new Special Report: “3 Safe Emerging Market Stocks for a Shaky Market.”
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