Letting The Air Out of The "Gold Bubble" Theory

What the gold bears don't seem to realize is that, despite its big gains, the gold market can't be a bubble when almost everyone seems to think it’s overpriced.

This is one of the characteristics of an actual bubble. Almost by definition, only a small group spots a bubble in real time and isn't seduced by the siren song. If you think about it, that makes some sense, because part of what drives the creation and growth of bubbles is the belief that you are not in one. Instead of being suspect, parabolic price appreciation gets rationalized away with statements like, "new economy," "this time, it's different" or "housing prices never go down."

Conversely, a widespread belief that steep price appreciation is unsustainable is a good sign that you are not in the midst of a bubble, since it is an argument against joining the action. Whereas during a bubble all you hear -- in the media, at parties or even from the bagger at the grocery store -- are the reasons you should jump in before it's too late.

The reason I bring all this up is because inane commentary about the gold market being a bubble continues almost daily, even despite last week's sharp correction. However, it recently occurred to me that virtually no one who recognized the tech-stock and/or real-estate bubble now says that gold is a bubble. In fact, almost all of us who identified those bubbles long before they burst actually own gold, and have for quite a while.

It is really only the people who missed the previous two who now think gold is a bubble. They were painfully wrong in the past, so now they are determined to spot the "next" one.

In addition, of course, I suspect that none of them own any gold themselves. So not only did they go 0-for-2 on the prior bubbles (Housing and dot-com), they have also missed out on as much as 600% of appreciation had they bought gold. That is a recipe for bias if I have ever seen one.

--Source