Bubbles are always obvious in retrospect. There has been an entire industry created around writing books about how obvious it was in 1999 that we were in a stock market bubble. It is informative to note that the number these books published after the crash greatly outnumber those written during the run-up. Those who through age or circumstance did not participate in the market at that time cannot understand how investors failed to realize that they were in such an obvious bubble.
One of the most oft-cited quotes, both from armchair stock analysts and discount rack bubble books, is Alan Greenspan’s “irrational exuberance” remark. But most people either forget or neglect to mention that Greenspan’s quote came in 1996, years before the market reached its zenith. If you had invested the night he made that speech and held for three years you would have made an enormous profit. In his book about Alan Greenspan titled Bubble Man, Peter Hartcher cites the example of Amazon being valued at 4 billion dollars in the late nineties, more than Barnes and Noble, as an example of the market’s exuberance, yet Amazon is now worth 73 billion.
The problem is that bubbles are almost always based on sound reasoning. The Internet really did transform the economy. Some companies born at that time, like Amazon, did become enormous successes and if you had invested in them during the bubble you would have made a lot of money in the long term. The problem is that investors often overreact to these legitimate changes.
If you think that Internet companies were overvalued relative to their earnings, what do you think about the current valuation of gold? How can you say that tech companies were overvalued in the nineties and not believe that gold is overvalued? If gold is worth $1,300 an ounce, why shouldn’t it be worth $3,000 an ounce? The reasoning for both prices is essentially the same. You need to ask yourself if you think gold should be worth $3,000 an ounce. If you don’t think so, you have to ask yourself why it is worth $1,300.
In the late 1990s, gold was worth less than $300 an ounce. In those days, interest rates were higher and the United States was running surpluses. Obviously, with interest rates lower, the US running large surpluses, and the Federal Reserve printing hundreds of billions of dollars, gold should be worth more; but how much more?
There is a strong possibility that gold will go higher from here; perhaps much higher. This may be a decent entry point, just as 1998 was a good time to buy Amazon, but maybe not. There is going to be a crash in the price of gold, I just don’t know what the price will be when the crash starts or what it will be when it ends. The only thing I can say for certain is that when it finally happens, there will be many books written castigating investors for failing to realize they were in the middle of the infamous Golden Bubble.
