Author Topic: Thinking Bubbles?  (Read 9119 times)

AdrianM

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Thinking Bubbles?
« on: May 18, 2012, 03:32:36 PM »
All the gold bubble talk got me thinking.

What or how do you define if an asset is in a bubble?
Now I don personally don't think gold is in a bubble, but I am always willing to challenge my assumptions.

My personal opinion.
Gold will eventually end up in a bubble, but we are not there yet.

A quick search of Google for what are the signs of a bubble. Gives me the following 5 signs.
1. Asset prices increase like a rocket.
2. Even the general public talks about investing in it.
3. Everyone is a winner.
4. people who did not invest before invest now.
5. This time is different syndrome.

The only one I could say yes or maybe to is number 1 all the rest are a no.


AJ

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Re: Thinking Bubbles?
« Reply #1 on: May 18, 2012, 04:18:47 PM »
The only one I could say yes or maybe to is number 1 all the rest are a no.

I'm not a gold expert by any means, but I see 1 through 4 as all being true. At least #2 for sure. Heck, there are sleazy commercials playing all the time trying to get folks to invest in gold. I know lots of folks who are worried about our financial system collapsing are investing heavily in gold. That is probably always true, but there are a lot more of them after 2008. I don't know enough to say with confidence gold is in a bubble, but I certainly would be surprised if it wasn't.

Lars

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Re: Thinking Bubbles?
« Reply #2 on: May 18, 2012, 04:20:02 PM »
All the gold bubble talk got me thinking.

What or how do you define if an asset is in a bubble?

 

in hindsight. :)

I find it fascinating how difficult it is to answer that question except in hindsight both in history and personally. Even if odds are excellent it is above its "fair value" price it appears impossible to predict just how high it will go and how long it will last. Even betting against them is perilous, since although it will eventually fall 75% from the current price, it might double or triple before than happens and take longer than you can afford.

arebelspy

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Re: Thinking Bubbles?
« Reply #3 on: May 19, 2012, 08:28:59 AM »

What or how do you define if an asset is in a bubble?

in hindsight. :)


BOOM!  Win.

Now that the thread's over, I'll offer my (joke) answer:  A bubble is any asset going up in price that I don't personally care for or want to invest in!
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Mr Mark

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Re: Thinking Bubbles?
« Reply #4 on: May 19, 2012, 10:31:52 AM »
....
5 signs.
1. Asset prices increase like a rocket.
2. Even the general public talks about investing in it.
3. Everyone is a winner.
4. people who did not invest before invest now.
5. This time is different syndrome.

The only one I could say yes or maybe to is number 1 all the rest are a no.

I disagree with your analysis.

1/ Yes. Although signs of peak evident.
2/ Yes. Gold buying & selling shops everywhere.
3/ Yes. It's portrayed that way in the ads. And note the rip-off agents selling antique coins, 'GoldLine', et al.
4/ Yes. Look at the ads, people buying coin, demand is higher for retail gold & silver, mints running hot.
5/ Yes, see the claims of coming hyperinflation, Fed 'printing' vast amounts, Fiat currency, Ron Paul, Mayan 2012...

Hindsight was a great answer, but there are signs in some assets when they 'bubble': PE ratio in stock, price to income/rent for housing, $ yield/acre for farmland, bond interest yields vs inflation, etc. The problem with gold is there is no easy comparison except perhaps ratio of cost to production costs, or relative to other assets. It's all about being able to sell it in the future to someone else for the same or more stuff. There is no income stream to monetise the asset.

And on those measures gold looks bubble over-valued right now, IMHO.


James

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Re: Thinking Bubbles?
« Reply #5 on: May 19, 2012, 12:50:53 PM »
I would definitely answer yes to all 5 points.

I especially hear number 5 when I talk to them about why they are still investing more in gold after it's already so high.

The question to ask is not where gold is now, but when will you buy and sell.  Historically the only way to beat the market with gold is to buy low and sell high.  No matter how smart you are and how much good information you think you have, there are smarter people with better information.  And they are advising the big buyers who control the market.  Everyone else looks back in hind sight and says, "wow, that was so obvious, anyone could have predicted that!"  Then they irrationally think they can predict the future gold price better than everyone else buying gold.

Gold is like everything else, known and expected future changes are already priced in.  What gold is selling for at this point is the real value, which includes the known risks about the future.

I do think we are in a bubble, but whether it has a steep pitch up to the top yet to come is something we can't know, but it's not terribly unlikely.  If there is a steep climb that jumps way up there, do you have the nerve to sell at that point?  Everyone and everything will be screaming at you to buy more.  The world will look like it is coming to a financial end.  Gold will seem like the absolute best place to have your money, which is why it will jump so high.  And that is the point you have to somehow sell.
« Last Edit: May 19, 2012, 12:53:08 PM by James »

iwannaretire

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Re: Thinking Bubbles?
« Reply #6 on: May 19, 2012, 12:59:52 PM »
To determine a bubble, I would add:  an asset is in a bubble when it makes the front cover of news magazines geared for the general public.

I can't recall if I've seen that yet. 

I'm just curious, if everyone thinks gold is in a bubble, what do they think about bonds?

Lars

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Re: Thinking Bubbles?
« Reply #7 on: May 19, 2012, 09:07:41 PM »
I'm confident the next thirty years won't be as good as the last 30 for bonds and wish they were cheaper but still think they have a place in my portfolio at around 20%. I just could not do that with gold - make it part of my portfolio - when I started hearing a lot more about it the last couple years.

Anyone placed any bets against gold or planning to if it spikes?

arebelspy

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Re: Thinking Bubbles?
« Reply #8 on: May 20, 2012, 04:08:15 AM »
I'm confident the next thirty years won't be as good as the last 30 for bonds and wish they were cheaper but still think they have a place in my portfolio at around 20%. I just could not do that with gold - make it part of my portfolio - when I started hearing a lot more about it the last couple years.

Anyone placed any bets against gold or planning to if it spikes?

No. If I knew when it was going up, I'd bet on it. If I knew when it was going down, I'd bet against it.

Unfortunately, I don't know that. A feeling is not good enough; the market can stay rational longer than I can stay solvent, and my crystal ball is broken.

So it'd just be guessing and gambling, and I live in Vegas, I already have plenty of opportunity for that.
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Mr Mark

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Re: Thinking Bubbles?
« Reply #9 on: May 20, 2012, 09:47:37 AM »
... A feeling is not good enough; the market can stay rational longer than I can stay solvent,

You meant to say 'irrational' I prsume?  ;-)

arebelspy

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Re: Thinking Bubbles?
« Reply #10 on: May 20, 2012, 09:50:23 AM »
... A feeling is not good enough; the market can stay rational longer than I can stay solvent,

You meant to say 'irrational' I prsume?  ;-)

Hah, Freudian slip.  You are correct about what I intended to say.

However, what I posted may be correct; it is very likely it is the market that can stay rational, as I am the irrational one.  ;)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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AdrianM

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Re: Thinking Bubbles?
« Reply #11 on: May 20, 2012, 02:39:21 PM »
I would definitely answer yes to all 5 points.

I especially hear number 5 when I talk to them about why they are still investing more in gold after it's already so high.

The question to ask is not where gold is now, but when will you buy and sell.  Historically the only way to beat the market with gold is to buy low and sell high.  No matter how smart you are and how much good information you think you have, there are smarter people with better information.  And they are advising the big buyers who control the market.  Everyone else looks back in hind sight and says, "wow, that was so obvious, anyone could have predicted that!"  Then they irrationally think they can predict the future gold price better than everyone else buying gold.

Gold is like everything else, known and expected future changes are already priced in.  What gold is selling for at this point is the real value, which includes the known risks about the future.

I do think we are in a bubble, but whether it has a steep pitch up to the top yet to come is something we can't know, but it's not terribly unlikely.  If there is a steep climb that jumps way up there, do you have the nerve to sell at that point?  Everyone and everything will be screaming at you to buy more.  The world will look like it is coming to a financial end.  Gold will seem like the absolute best place to have your money, which is why it will jump so high.  And that is the point you have to somehow sell.

Some very interesting points.

I built a position 4-5 years ago and then stopped.
(other investments to pursue.)

I have an exit point in mind, based on past occurrences. I am waiting for the Dow/Gold ration to drop to the 2-1 range.
Historically this has been the time to buy stocks as they will be beaten down to bargain basement levels.

I can remember hearing a commentator talk about how cheap, good resource stocks were in the Internet boom but no on was interested.
So I am looking for that sort of thing but I am just not hearing it.

My local financial newspaper is all commodities boom (iron and coal), Property and China, China, China hardly a word gold.

No adds on TV on how to trade gold but plenty for Options and CFD's.

The average man on the street still thinks negatively geared property is the road to riches.
(we are still in the early stages of our property bubble deflating)