Popular among laymen but not fully confirmed by empirical research, greater fool theory portrays bubbles as driven by the behavior of a perennially optimistic market participants (the fools) who buy overvalued assets in anticipation of selling it to other speculators (the greater fools) at a much higher price. According to this unsupported explanation, the bubbles continue as long as the fools can find greater fools to pay up for the overvalued asset. The bubbles will end only when the greater fool becomes the greatest fool who pays the top price for the overvalued asset and can no longer find another buyer to pay for it at a higher price.
Sweep the Leg Wrote: ------------------------------------------------------- > What makes you think gold is in a bubble? > Specifically, how would you define a bubble? Look at a 30-year chart of gold. That’s a bubble.
In other words, you’re calling a bubble based entirely on subjective observations (i.e. lots of Cash4Gold commercials). I fully agree those commercials and the retail demand are worth paying attention to, but looking at actual data may give you a different perspective. In 1981, gold’s former glory days, gold and gold stocks made up an amazing 26% of global assets. Today all this gold hysteria has driven a whopping 0.70% of global assets into gold and gold stocks. Obviously there are many more investment options these days spreading the money around, but that’s an amazingly small amount. Another way to look at it is from a speculative position. If people were crazy about gold you’d expect to see a dramatic rise in net long option contracts out there. While net long contracts have increased over the last ten years, the rise has been steady, and actually peaked in 2010 and has been declining since. All this data is readily available from COMEX. Doesn’t really scream irrational exuberance. Although not my favorite ETF, we could look to GLD as a proxy too. Even though spot gold has gone up over the last couple years, the amount of physical gold held in trusts has been steadily declining from it’s peak in April 2010. This points to people actually leaving the gold market over the last year. Calling a bubble just because the price is too high for your comfort, or it just doesn’t feel right, doesn’t make any sense. Ask the guys that bet there was a bond bubble about to pop last year. Again, the data didn’t back it up and those guys got slaughtered.
Sweep the Leg Wrote: ------------------------------------------------------- > Calling a bubble just because the price is too > high for your comfort, or it just doesn’t feel > right, doesn’t make any sense. Ask the guys that > bet there was a bond bubble about to pop last > year. Again, the data didn’t back it up and those > guys got slaughtered. Sure it makes sense. People who shorted tech stocks in the late 90s got slaughtered before they were proven correct. Same with ones who shorted sub prime. How would you have liked to shorted tulips during that mania. Read Whitney Tilson’s letter on why he was short NFLX and then why he covered the position. Being early doesn’t make you wrong - it just can mean you are out of a job. 
> In 1981, gold’s former glory days, gold and gold > stocks made up an amazing 26% of global assets. > Today all this gold hysteria has driven a whopping > 0.70% of global assets into gold and gold stocks. > Obviously there are many more investment options > these days spreading the money around, but that’s > an amazingly small amount. I don’t know the source for these numbers so not sure they are accurate, but assuming they are were these really “glory days”? Gold fell 84% after this time period. If you were invested you lost almost everything.
You have to look under the hood. Being able to copy and past the first paragraph of “economic bubble” from Wikipedia doesn’t really help your case. I’m talking about actual data on the gold market. Both the tech bubble and the housing market were defined by massive flows, intense speculation (in the form of huge net long contract positions), and, perhaps most importantly, the use of leverage. None of those things are occuring in the gold market (to the same degree) right now. The “glory days” reference was when gold hit its inflation adjusted all-time high. It abruptly ended when gold crashed. For further perspective, gold and gold stocks as a percent of global assets: 1921 - 28% 1932 - 20% 1948 - 30% 1981 - 26% 2010 - 0.70%* Sources: Silberjunge.de, Erste Group Research *Estimate based on data obtained by McKinsey & Co., IMF, CPM Group, Thompson Reuters, BIS Sprott Asset Management compiled the data. There’s a huge difference between a bubble and a secular bull market. Obviously I may be wrong, but all signs seem to point gold is in the latter. Mistaking a secular trend for a bubble is easy…and costly.
Sweep the Leg Wrote: ------------------------------------------------------- > You have to look under the hood. Being able to > copy and past the first paragraph of “economic > bubble” from Wikipedia doesn’t really help your > case. I’m talking about actual data on the gold > market. Both the tech bubble and the housing > market were defined by massive flows, intense > speculation (in the form of huge net long contract > positions), and, perhaps most importantly, the use > of leverage. None of those things are occuring in > the gold market (to the same degree) right now. Haha. You just asked for a definition. No need to get touchy. Wikipedia is just one of many sources and I don’t plan on making up my own definition. The concept of a bubble is pretty self-explanatory. What exactly is “under the hood” of the gold market? Some cash flows or other fundamentals I am missing? > The “glory days” reference was when gold hit its > inflation adjusted all-time high. It abruptly > ended when gold crashed. For further perspective, > gold and gold stocks as a percent of global > assets: > > 1921 - 28% > 1932 - 20% > 1948 - 30% > 1981 - 26% > 2010 - 0.70%* > > Sources: Silberjunge.de, Erste Group Research > *Estimate based on data obtained by McKinsey & > Co., IMF, CPM Group, Thompson Reuters, BIS > Sprott Asset Management compiled the data. My point is that saying the “glory days” were right before gold lost 84% of its value in a short period of time seems a bit odd. > There’s a huge difference between a bubble and a > secular bull market. Obviously I may be wrong, > but all signs seem to point gold is in the latter. > Mistaking a secular trend for a bubble is > easy…and costly. All signs? What about the fact that gold officially entered a bear market (down 20%) this morning? I wouldn’t say “all signs” are on your side of the trade. Mine is the one that is making money right now.
Sweep the Leg Wrote: ------------------------------------------------------- > You have to look under the hood. Being able to > copy and past the first paragraph of “economic > bubble” from Wikipedia doesn’t really help your > case. I’m talking about actual data on the gold > market. Both the tech bubble and the housing > market were defined by massive flows, intense > speculation (in the form of huge net long contract > positions), and, perhaps most importantly, the use > of leverage. None of those things are occuring in > the gold market (to the same degree) right now. Wha? Gold is traded via futures which are usually traded via leverage. When the CME changes margin requirements, the price is directly affected. Daily front-month volume in GC is 2x what it was 5 years ago and 4x what it was 10 years ago. The dollar-volume traded is an even higher ratio, since the price has appreciated. The volume increase in GLD is even more obvious…
Dwight Wrote: ------------------------------------------------------- > The concept of a bubble is pretty > self-explanatory. All signs point to the contrary. That’s the whole point. Can you (not you specifically, the “royal” you) tell the difference between a bubble and a secular trend? It matters. > What exactly is “under the hood” of the gold > market? Some cash flows or other fundamentals I > am missing? What’s “under the hood?” Well let’s see…first you have to consider all sorts of global macro factors - reserve currency trends, inflation expectations, debt/GDP trends, etc. Then you have to look at demand trends - China and India entering into the consumer market for gold and silver for example. How about supply? Where are the mines? Political risks (nationalization), oil prices…what’s the marginal cost of an ounce of gold or silver? That’s just the surface. > > The “glory days” reference was when gold hit > its > > inflation adjusted all-time high. It abruptly > > ended when gold crashed. It was a relevant time frame. That was much more of a bubble scenario than what we’re experiencing today. And, you should be able to tell why the two times are dissimilar. > All signs? What about the fact that gold > officially entered a bear market (down 20%) this > morning? I wouldn’t say “all signs” are on your > side of the trade. Mine is the one that is making > money right now. That’s extremely myopic. I’ve asked this before, what has fundamentally changed? I don’t give a shiat about technicals. This isn’t a trade.
justin88 Wrote: ------------------------------------------------------- > Wha? > > Gold is traded via futures which are usually > traded via leverage. When the CME changes margin > requirements, the price is directly affected. > > Daily front-month volume in GC is 2x what it was 5 > years ago and 4x what it was 10 years ago. The > dollar-volume traded is an even higher ratio, > since the price has appreciated. > > The volume increase in GLD is even more obvious… During the housing bubble and the dotcom bubble before, people (retail investors to hedge funds) borrowed money to go long. This hasn’t been the case with gold. I wasn’t talking about futures contracts, which, as you pointed out, have been hammered by margin hikes.
Sweep the Leg Wrote: ------------------------------------------------------- > All signs point to the contrary. That’s the whole > point. Can you (not you specifically, the “royal” > you) tell the difference between a bubble and a > secular trend? It matters. Please provide your own definition then. This is a one-sided attack. I really do not see the relevance of debating the definition of “bubble”. Was Maddoff a fraud? Yes. Should I define fraud for you too? I may not be able to tell you how much someone weighs but I can tell you whether or not they are “fat”. > What’s “under the hood?” Well let’s see…first > you have to consider all sorts of global macro > factors - reserve currency trends, inflation > expectations, debt/GDP trends, etc. Then you have > to look at demand trends - China and India > entering into the consumer market for gold and > silver for example. How about supply? Where are > the mines? Political risks (nationalization), oil > prices…what’s the marginal cost of an ounce of > gold or silver? That’s just the surface. Hmm so those things must have reversed the past few weeks for gold to sell off by 20% right? I mean if those are drivers of gold prices and gold goes down then debt/GDPs etc must be getting better. Otherwise it is not a true driver. The story doesn’t fit the reality. > It was a relevant time frame. That was much more > of a bubble scenario than what we’re experiencing > today. And, you should be able to tell why the > two times are dissimilar. I disagree. This is like me saying that 1929 was the “glory days” of the stock market. History doesn’t repeat but it echos. The Hunt brothers and other speculators got crushed back in the 80s and the ETF holders and other speculators will have the same thing happen to them. > That’s extremely myopic. I’ve asked this before, > what has fundamentally changed? I don’t give a > shiat about technicals. This isn’t a trade. If nothing has fundamentally changed, and the market moves against you in a big way, I would question the fundamentals that you are relying on.
I thought I made it pretty clear what my definition of a bubble was in previous posts. Massive flows going to an asset, a spike in net long option contracts (speculation), and the use of leverage. Those are actual objective datapoints you can look at to help you determine if a bubble exists. And again, as I’ve stated several times before, the 20% correction has not been a result of any of the fundamentals changing. That’s why I still like PMs as a long term investment and see this dip as a good buying opportunity. Is 1929 the all-time inflation-adjusted high for the stock market? No. A better example would have been before the internet bubble popped. More and more I believe you’re simply trolling this forum. All you do is pick apart other people’s posts without ever offering an original thought of your own.
Sweep the Leg Wrote: ------------------------------------------------------- > More and more I believe you’re simply trolling > this forum. All you do is pick apart other > people’s posts without ever offering an original > thought of your own. No need to get personal. If you think that I am saying anything appropriate then report me and get Chad to kick me out. I am as free as you are to add to the discussion and post my views.
Sweep the Leg Wrote: ------------------------------------------------------- > net long option contracts (speculation) this doesn’t make any sense. what do you mean here?
i wager all this bickering won’t change anybody’s mind. put your money where you mouth is and that’s it. All you guys bring up good points, but not a thing has been learned. I was saying Gold would go up and reach 2000 for over a year now based on the erosion of money supply and the state of world affairs (shifting of power to the east etc.). I did not buy a single gold related investment for the simple fact that I can have this exact same convo over and over again. In other words, you can’t determine the intrinsic value.
justin88 Wrote: ------------------------------------------------------- > Sweep the Leg Wrote: > -------------------------------------------------- > ----- > > net long option contracts (speculation) > > this doesn’t make any sense. what do you mean > here? What does it mean if the contracts are net long or why does it matter? For the former, just Google “comex gold net long” and you’ll get all the info you need. When you look at the net position it can give you a feel for the market sentiment. But really you want to look at any major shifts. A huge surge (long for example) could mean people are overly optimistic about the asset…perhaps a bubble.
How do you measure net long? Are you counting puts vs calls? Are you counting futures positions minus positions held by professional market makers? Just curious what data is available to do that.
JDV said it best once: “Why argue with someone when I can just bet against him”.
JDV still comes on here? …its funny how you guys are discussing the definition of “bubble”…who really cares what the definition is, you know it when it pops. Just be patient.
bchadwick Wrote: ------------------------------------------------------- > How do you measure net long? Are you counting > puts vs calls? Are you counting futures positions > minus positions held by professional market > makers? Just curious what data is available to do > that. I just realized I kept saying “options” but I was being lazy. That wasn’t accurate. Futures would be a better fit. COMEX releases the data at least monthly. I assume the calculations are pretty straightforward, but i’ve never bothered to check. The same can be done with options by calculating the difference in open interest. Harvey Organ does that daily.
In my mind, a bubble forming is substantial overvaluation + ongoing upward momentum. Naturally, that has to imply some way to figure out if something is fairly valued (momentum is a little easier to identify). Lots of people just like to say “it’s a bubble” when they feel the price of something is overvalued. But it’s got to be more than that to be a bubble. Overvaluation does not necessarily lead to a crash… there are other ways it can end. Things can be overvalued and float down more slowly. Or things can simply stop rising for a while and wait for enough time to pass so that the returns over the long term are in line with the proper level of asset risk. The acquisition of assets to sell to greater fools is a key characteristic of bubbles, but I’m not sure it makes sense to make it the definition, because it is hard to know just why it is that the average buyer is buying. At the end of the day, we’re just guessing about why hundreds of thousands of people send in their orders for this or that. Sometimes our guess has more evidence to support it than others, but it’s still basically guessing. The problem with bubbles is that you can be wrong for a long long time waiting for them to pop. While this is happening, everyone is telling you that you are an idiot and don’t understand what’s going on, and clients are withdrawing their money from you. So trying to figure out the right strategy is key, and in my experience, it does seem that trend following is one of the better ways to handle it. Admittedly, I’m still trying to figure out the best sell discipline and set of rules for that. Moving averages seem to work reasonably well, but they often send signals so late that lots of profits have disappeared. Stop loss and take profit targets also seem to be helpful, but can lead to whipsawing and larger transaction costs. I’m better than I used to be on this stuff, but it’s still a challenge. I’d be curious what other people find works for their sell/exit disciplines.