Is gold in bubble territory?

The price of gold is soaring, leaving many wondering if we’re in a bubble.

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by Sarah Efron
February 4th, 2010

From the February/March 2010 issue of the magazine.

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Since April 2008 the price of gold has soared by 38%, to about US$1,100 an ounce. Right-wing pundits are touting gold and guns as a hedge against economic collapse, prime-time TV has been inundated by Cash4Gold ads, and Harrods department store in London is selling 27-lb gold bars. It all makes one wonder: could gold be in bubble territory?

To find out, U.S. economist Dean Baker, who has written extensively about financial bubbles, says we need to ask if there is a fundamental reason that gold has become more valuable. Is there a major slowdown in global gold production? Are people around the globe donning massive amounts of bling?

If the answer to those questions is no — and it is — that means the price is being driven up by people’s fears rather than fundamentals, says Baker. Investors may be afraid of inflation, currency decline, even of a complete economic collapse in the States. If any of those fears come to pass, the surging price of gold may prove to be valid. But most economists say that an utter global meltdown is unlikely — which makes a gold bubble likely.

“We don’t see too many bubbles out there at the moment, but we think that gold is one,” says Brian Nick, an investment strategist with Barclays Wealth, Americas. “We don’t think the environment we’re in right now is one where gold should have had this kind of run-up.” So should you invest in gold? Only if you have impeccable timing. You’ll need it to get out before it crashes.

59 comments on “Is gold in bubble territory?

  1. If the world was to go back prior to Aug 15th1971, when the dollar was gold backed than the amount of gold divided by the TRILLIONS AND TRILLIONS of paper currency today would be well more than $50,000.00 an oz!
    Add to that the hundreds of TRILLIONS in derivatives and only God knows what the price of REAL money would be!
    Me thinks the Bankers know this also and are loading up or they are fools, stupid fools.

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  2. I hope the bubble bursts soon, and all the greedy rich panic and lose their shirts.

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