The Gold Bubble

by | Jul. 19, 2010

Finances

Dear Dave,

I agree that historically gold is an extremely volatile investment. But wouldn't it be a good idea to take advantage of this gold bubble and its popularity due to the market's current hysteria?

Kevin

Dear Kevin,

A bubble is when an investment is no longer based on numbers, but on greed or fear. So, you're right on about it being a gold bubble. That's exactly what's happening at this point. Now, should you take advantage of that? Absolutely not. You never know when a bubble will burst, but trust me - the bubble will burst on gold.

Here's what happens during a bubble, using the real estate market as an example. Several years ago, Las Vegas was the fastest growing city in North America. People were drawn by the flashing lights and the commercials. Most of them didn't know the city had a vibrant, legitimate economy without all the gambling and glitter. There was a gold rush mentality when it came to buying property, and an irrational level of excitement drove the prices. In the end, it was a lot like playing musical chairs. The music stopped, and lots of folks were left without a seat. Someone gets booted every time!

A lot of this stuff about gold comes from the foolish idea that it's the standard the world is based upon. This simply is not true. Gold is not the standard that wealth is based on, and it hasn't been since the days of the Roman Empire. Gold has no intrinsic value. As a matter of fact, silver is probably a better investment. It's being used like crazy in manufacturing for microchips and other products, and because of this has an actual mechanical, utilitarian value.

I work way too hard for my money to mess around and see it disappear in the blink of an eye. That's why I don't mess with bubbles. When it comes to investing, I want to be the tortoise - not the hare. I'm going to invest in things that are steady, slow, and have long track records of success!

-Dave

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