Preface
Someone with “perfect foresight” should have foreseen that the process was not sustainable and that an implosion was inevitable.1
—Charles Kindleberger
Gold is in a bubble that is set to burst.
I sit and write this without a clue as to whether we've reached the top in gold or whether we're getting ready for a parabolic rise. All I know is that gold is in a bubble, gold prices will come crashing down, and many people will lose a lot of money. I write this book after a year of intense analysis of gold, commodities, emerging markets, the dollar, and the stock market. After carefully, meticulously, and thoroughly analyzing gold prices since the 1880s, inflation trends, fundamental stories, chart patterns, investment behavior, news coverage, and a nearly endless amount of information from stock prices to economics to psychology—I boldly and justifiably claim that gold is in a bubble that is ultimately due to collapse and severely hurt the average investor.
I am not yet sure of exactly when the bubble will pop, though I have a few analysis-based guesses. What I do know, however, is that this book is an extremely time-sensitive matter; it must be made public as soon as possible. While this book offers an extremely in-depth analysis of gold and all of its driving factors, the lessons learned within and the clues pointing to a bubble will likely serve as a tremendous benefit for analysis of future bubbles across a wide range of asset classes.
At the height of the technology bubble and again at the height of the housing bubble, Yale Professor Robert Shiller released the first and second editions of his book Irrational Exuberance—a prediction of an impending collapse in the markets due to extreme investor enthusiasm and unsustainable speculative bubbles. Not only did Shiller make two of the greatest calls in market history, but his highly contrarian opinions were published despite the fact that the rest of the world believed the opposite: that technology and housing would continue to soar (though we now know they were all wrong). With gold prices up over 600 percent in 10 years, and with huge warning signs appearing that signal extreme investor enthusiasm, euphoric herd behavior, and an upcoming collapse to the Gold Bubble, I have written my own version of Irrational Exuberance. But this time, irrational exuberance has appeared because of massive fears and extreme pessimism over the future of markets and the U.S. dollar. This time, gold is the subject of irrational exuberance.
To make matters worse, unlike in the case of technology stocks and housing, gold's historical significance has created an aura and illusion that gold prices will never fall. Since gold has been used as currency and has been sought after by nearly every civilization for thousands of years, gold investors assume that investing in gold is “safe.” But with gold now an object of mass speculation and subject to herd-like behavior, we are not far from the day when investors realize that gold is, in fact, an “unsafe haven.”
After writing this book and putting all of the pieces together to form a coherent picture of gold's history and future, I cannot be any less than 95 percent certain that gold is setting up for a devastating fall. All the evidence I see, all the strategies I have learned in spotting bubbles, all the technicals, charts, stories, and commercials show me signs of a bubble. The entire world picture fits in almost perfectly with my view on gold. I finally see how economics, currencies, stock markets, reserve rates, inflation, forecasts, commodities, time, and the consumer all blend together to form a coherent big-picture view of the markets and the world.
To further support this claim, I have supported my analysis by applying some of the most prominent works written by industry leaders and highly regarded analysts. For studies of asset bubbles, speculative manias, financial crises, and their precipitating factors, I have applied Robert Shiller's bestselling Irrational Exuberance and Charles Kindleberger's Manias, Panics, and Crashes. For analysis of Elliott Waves and growth/decay cycles, I have applied Frost and Prechter's Elliott Wave Principle. For a better understanding of how different markets, sectors, indices, and asset classes interact, I have applied John Murphy's Intermarket Analysis. Finally, for behavioral studies and investor psychology, I have applied Martin Pring's Investment Psychology Explained and Carl Futia's The Art of Contrarian Trading. These books have not only provided a very thorough set of references, but have also strongly supported my analysis and claims of a bubble in gold.
In short, I have written a book because I have found a perfect example of a bubble—and one that I have followed for quite some time. I have provided plenty of charts and images that may better explain what I'm writing about—I'm a visual person myself. I have extended and further developed the gold bubble argument into a groundbreaking and ultimately accurate prediction at a time when the rest of the world is “irrationally exuberant” about the future of gold. Finally, because the opportunity presented itself, I have followed this bubble, analyzed it even to my occasional disbelief, and written a guide to the impending collapse of the gold bubble. I strongly think this book has the potential to become a foundational go-to guide for identifying bubbles and speculative manias.
This book covers why gold has become so popular, what factors have allowed it to become so overvalued, what signs point to a speculative bubble, and how to profit from its collapse.
Chapter 1 launches our analysis of the gold bubble by asking the most basic question: Why gold? Knowing the importance of considering all sides and opinions, I have tried my best to present the standard arguments many have used for investing in gold. Understanding what arguments gold investors have used to support their claims helps put the gold theme in context, and gives us a better picture of the strong fundamental reasons and deep-rooted beliefs that gold investors have relied on to justify their decisions.
Chapter 2 presents the structural and precipitating factors that have allowed a gold bubble to form. It is one thing to know the reasons used for buying gold, but it is even more important to understand the specific events and contributing factors that have enabled a very risky asset bubble to form. Many stocks or investments have good reasons that may justify their purchase, but an asset bubble requires certain structural and emotional factors that enable a much larger speculative mania to take place. Identifying those enablers is the second step in determining the bubble's size, scope, and potential peak. In other words, if we can uncover when and how the bubble began, we have a much better chance of figuring out when and how the bubble might burst.
After determining the forces behind gold's surge in Chapters 1 and 2, we present an extremely thorough analysis of the many signs pointing to a gold bubble. Chapters 1 and 2 set the foundation for why a bubble in gold is possible, but Chapter 3 presents the many clues that signal that an actual bubble has formed. Breaking down the numerous signs of a bubble into four main categories, I have pointed to what I consider to be the most common characteristics found in nearly all asset bubbles—parabolic price increases, massive publicity, overspeculation, and extreme expectations. Applying them to gold, I then present very specific examples within each category of the bubble. After reading Chapter 3, readers should have tremendous doubts about the safety and future profitability of gold investing. Chapter 3 should convince readers that a gold bubble is almost obvious.
Once a gold bubble is essentially confirmed by the long list of warning signs and red flags discussed in Chapter 3, Chapter 4 discredits the claims made by many that gold is a “safe haven” during recessions. By discussing gold's performance during the Great Depression and past recessions, Chapter 4 presents the case that gold is an “unsafe haven” and is wrongly relied on as a safe investment during deflationary periods. Chapter 4 also shows how overvalued gold is by comparing it to other asset classes and their historical relationship. By many counts, gold prices have increased far more than the prices of cars, houses, stocks, and other precious metals over the same time period. Gold prices may have had a good reason to rise, but prices have reached extremes—especially when compared to other asset classes.
Chapter 5 analyzes long-term gold prices, defines the stages of the bubble, and forecasts price targets for when the bubble collapses. Applying a heavy dose of technical analysis, Elliott Waves, Fibonacci time relationships, and seasonality patterns, Chapter 5 puts gold prices into historical context and shows why gold is nearing the end of a growth and decay cycle dating back to 1934. It should be shocking how well gold prices conform to the typical structure of a bubble.
Having established why gold is in a bubble, why it is set to burst, and what stage of the bubble we currently find ourselves in, Chapter 6 discusses the many outside factors that gold depends on, from stock markets to the U.S. dollar to emerging market troubles to Middle East and European upheavals. Since every investment ultimately relies on, or reacts to, outside factors and events, pinpointing all the determinants of gold's future price-moves helps us better predict when the bubble will pop. Since gold's popularity has soared to such a great extent due to poor stock market performance, Chapter 6 asks whether the fate of the stock market strongly influences gold prices, and why a fall in stocks or the onset of a recession could trigger the end of gold's run. Moreover, since gold's massive rise has coincided with huge declines in paper currencies and arguments of the U.S. dollar's demise, Chapter 6 presents the case of a dollar comeback and its implications for gold prices.
Perhaps the largest determinant of the fate of the global economy and the future of commodity prices, the strength of emerging markets is vital to the continuation of the bull markets in stocks, commodities, and gold. However, a multitude of signs have been surfacing that show weakening emerging markets, especially in China and Brazil. Expectations have been so high for emerging market growth and demand that these highly troubling signs of a slowdown could mean the beginning of a global recession and the end of the gold bubble. Add to that the giant upheavals and revolutions in the Middle East and the European banking crisis, which could spiral out of control and drag the entire global economy into recession (or worse), and it is clear that severe risks stand in our way. Chapter 6 explains why gold will be affected.
After having established that a bubble is nearly certain and that its collapse is inevitable, Chapter 7 searches for the signs of reversal that warn of an impending peak. Up until then, the book discusses why there's a bubble, why it will collapse, and what factors will influence gold prices; Chapter 7 discusses the signs that point to a developing peak—signs that show up as the bubble loses steam and prepares for a collapse.
Chapter 8 represents perhaps the most important aspect of this book for investors: ways to profit from the collapse of the gold bubble. Chapters 1 to 7 are extremely important for understanding why gold is in a bubble and how to best predict gold's future prices, but Chapter 8 puts it all together to form a coherent plan for turning knowledge into money. By presenting simple short-selling strategies, complex options strategies, pair trades, and alternative investment ideas, Chapter 8 offers a substantial number of methods and approaches for profiting from gold's collapse.
Chapter 9 looks beyond the gold bubble. Having presented readers with a very thorough description of the gold bubble, I offer Chapter 9 as an examination of other potential bubbles on the horizon: technology stocks, the IPO mania led by Facebook and the social media revolution, and Netflix, which has already seen a huge collapse. The case studies in Chapter 9 provide insight into how to apply the characteristics of a bubble to any popular theme. Readers can use what they learn from this book by applying it to future investment themes, spotting bubbles, and avoiding or even profiting from their demise. Gold is just one example of a bubble.
I have thoroughly enjoyed the arduous, yet very rewarding, process of writing this book. Taking a broad idea of “gold bubble” and developing it from start to finish, with a huge range of information, charts, and theories, has been tremendously gratifying. Not all accomplishments allow a person to look back and physically see tangible proof. I consider writing a book to be one of my lifelong goals, and I do not intend to stop here. This is just the beginning.
Please do not dismiss the gold bubble argument if you disagree with or find fault with one of my claims—there are so many different reasons and indicators of a bubble that you're almost guaranteed to be more effective in your trades from reading this book. You will likely find a number of reasons that will at least make you question gold.
Enjoy the read.
Yoni Jacobs
November 11, 2011