Is there a gold bubble bursting before our eyes, or is the recent drawback in the precious metal’s price just a pause like the one we saw in May or the one at the beginning of 2011?
Investment adviser Charles Sizemore makes a compelling case for why the gold bubble has indeed started to pop. But whether he’s right or wrong, one thing is certain: Investors in the precious metal better prepare for continued volatility. Gold prices have plummeted since Monday’s peak of $1,897 to around $1,762 as of Wednesday.
The 8% slide in a matter of days is indeed dramatic, but it might not mean there is a gold bubble bursting. Many folks think the precious metal will continue to soar as inflationary pressures persist and investors seek a safe haven in this mixed-up market. With high unemployment and weak consumer spending holding back stocks on one hand, and the S&P downgrade and meager yields in Treasury notes on the other, where are you going to invest?
Of course, the other side of the coin is that a gold bubble has been inflated by speculators and investors running with the crowd without thinking. Once that cash clears out, it could be a race to the bottom for gold prices.
Want to know how much of a fad investment gold is right now? The SPDR Gold Trust (NYSE:GLD) is now the largest exchange-traded fund, surpassing the SPDR S&P 500 ETF (NYSE:SPY) in assets this week.
Of course, the No. 1 spot on the ETF list is just the latest in a long line of anecdotes that show the popularity of gold. Gold vending machines, cash-for-gold schemes advertised at pawnshops and via infomercials — you name it.
Gold is no longer contrarian. The mainstream nature of the GLD gold ETF and the browbeating commercials over gold prices should tell you that this is not a very well-kept secret. Once folks begin to talk about gold prices as a “sure thing” the way they did about tech stocks or the housing market, it’s time to get skeptical. The idea that gold somehow moves separately from stocks and can insulate you from market fallout is poppycock considering how common gold investments are among both retail and institutional investors.
What’s more, while the GLD gold ETF is more popular than stocks, it is hardly the end of the line for equities. Reuters reported that the average U.S. volume spiked to 11.8 billion shares daily last week, and if the pace keeps up we could top the record 12.1 billion shares set in May 2010. Investors clearly are interested in stocks — not running for cover. And let’s not forget that even after the recent steep drop, the broader stock market is up over 12% from where it was 12 months ago.
To be sure, there are compelling reasons to invest in gold right now. If you think inflation will heat up, stocks will continue to go haywire and the 2.3% yield in 10-year T-Notes doesn’t move you, gold seems as good a place as any to park your cash.
But if you think gold has nowhere to go but up, the last few days should be a wake-up call.
At best, the extreme volatility of gold has been hammered home to investors — something that cannot be overlooked if you are looking for a “low-risk” play. At worst, it’s a sign that speculators and greedy investors were loading up on gold only for short-term profits and will move on to the next fad soon if they think gold is yesterday’s news.
Of course, as long as the GLD fund remains the most popular ETF in the market, it’s hard to argue that traders are running for the exits just yet.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
