Stock talk for the main street investor.

The Next Bubble

Asset bubbles always sound like a great idea on the way up. Remember when dotcoms were the next best thing. When they blew up we lowered risk by investing in the safest investment around… real estate. How did that one work out?

It wasn’t that these investments had a poor thesis to begin with. After all, the internet is just starting to realize it’s potential, and it’s true, real estate is a relatively safe tangible asset long term. The problem arises when a stampede starts running in the same direction the thesis starts to lose it’s value. Fundamentals that began sound and rational get out of control.

Lets go through the two main thesis the gold rush is built on.

1 – Inflation Hedge: This is one of the great lies of investing. Gold is not an inflation hedge and never has been. In 1983 gold was just over $500 an ounce. In January the CPI was 97.8 and today it’s 216.33. That means gold should have followed an almost straight line path from $500 to $1106. But instead it lagged through the 90s and early 2000s before gaining almost 400% in the last eight years.

The truth is, gold’s last major run-up was just BEFORE inflation hit in the early 80s. Gold didn’t keep pace with inflation and actually fell when inflation was double digits from 1979-81.

2 – Hedge Against The Dollar: This might hold a little more weight but if you’re worried about the value of the dollar why not hedge with Euros or Yen? Or you could invest in foreign equities or bonds. Aren’t these more direct hedge?

One way to short gold in this market is to own DGZ a short gold ETN from PowerShares. I’m seriously considering this for my portfolio.

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