State Street Global Advisors cautions on gold bubble bursting

State Street Global Advisors warns that a bullion bubble bursting would be “monumentally bad”, and the asset class “will be crushed”.

The forecast comes from SSGA’s Chris Goolgasian, whom we followed last week as he tackled the difficult subject of how to value gold.

This week, we present the argument he makes in a regular report for SPDRS Gold ETF on whether gold is an asset bubble, how one should recognise when it is, and how painful an eventual deflation of any bullion bubble could be.

He draws on his experience living through the technology stock bubble and more recent housing bubble, listing three characteristics that typify bubbles.

These are that the asset becomes widely owned, people become involved in the asset who do not “seemingly do this as a day job”; that the asset “becomes easy to own psychologically, with few objections, naysayers or cynics”; and that a large number of ways appear to invest in the asset class.

In the bubble, for example, one could buy IPOs, sector technology funds and even internet-specific portfolios.

But Goolgasian suggests, whereas in the case of shares one could look to valuation measures to decide whether the sector was at bubble levels, “in gold’s case, there is no template for a P/E or appreciation versus a ‘norm’. Therefore, the ‘observables’ become critical.”

Goolgasian runs through these in order.

He turns to research jointly by SSGA and Ned Davis Research, looking at some other ‘bubbles’ by comparison for duration and magnitude.

At the end of the last gold bull run, to January 1980, over 10 years it had risen 1836%, before then falling 26.4% over the following 12 months. Over 10 years to June 2007, Uranium saw a 1171% gain, then a 56.6% 12-month fall. And the Nasdaq index over the decade to March 2000 rose 949.9%, then lost 59.8% the following 12 months.

And gold’s spot price presently? It gained 526.3% over 10 years to mid-January.

“Our view, therefore, is that we are not yet in a ‘bubble’ and it is worth noting that once you are in a bubble, for a time, there is still money to be made. Some day, however, we could have a true gold bubble on our hands. Note the use of the word ‘could’. Some asset classes see bull markets and subsequent crashes, but their bull market phase may never have truly qualified as a ‘bubble’. Look at the housing or banking stocks’ climb before their precipitous drop in 2007/2008.”


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