Is gold in bubble territory?

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

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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.

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