Is Precious Metals Investing a Bubble?

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Is Precious Metals Investing a Bubble? Many people have turned to precious metals during the financial crises of the late 2000′s for the purpose of ‘safe’ investing, but is it a bubble trend on the verge of bursting?

It’s difficult to say and many experts have conflicting opinions on the matter. People invest in precious metals like gold and silver because they are considered to be less susceptible to the fluctuating market, as described in the following Wikipedia excerpt on “investing in gold”:

“Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest).”

Is Precious Metals Investing a Bubble?

As the financial crisis has continued over the years, so has the trend of investing in precious metals. But will the bubble burst? Let’s look at what some of the experts say on the matter.

Arguments that precious metals may be in a soon-to-burst bubble:

Wealth Cycles:

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“The word bubble is often associated the word mania—a word that connotes that the public has lost touch with reality. History is replete with manias of all stripes—canal manias, bridge manias, technology manias, and stock manias—and most of them involve a touch of madness when viewed through the rational passage of time.

But a bubble in precious metals will be unlike those manias because it combines both fear and greed. Profit-seekers will see rising prices as a sign to jump into the fray, and people just looking to preserve their purchasing power will make a mad dash as well. It is one of the very few bubbles that combine the madness of greed with the thrashing of panic.“

Fat Wallet writes:

“Today, gold sells for roughly 3x the cost of production and silver sells for anywhere from 2x to much much higher depending on whose model you use. To me, it all feels very much like how residential real estate felt in 2005.

So why do I care? I still hold a fair amount of gold and silver. I don’t want to sell too early and miss out on profits. Similarly, I do not want to hold on to long and be stuck with what I think will be tragically lower prices.

I’ll start off the discussion by saying I do think precious metals and specifically gold and silver are in a bubble.

I think at least 3 things have the potential to pop the bubble, either individually or in combination
1. Rising interest rates increase the carrying cost of gold and gold loans form the current near zero to 3-4%, thereby making it much more expensive to park money in gold
2. Mining capital expenditures currently in process come on line significantly increasing the annual production of PM
3. The current banking/currency panic abates, as all panics eventually do. “

Arguments that precious metals are NOT in a bubble:

Commodity expert John Stevenson responding in MoneyShow to the question: are precious metals in a bubble?

“Absolutely not. In fact, I think what you’re going to see is gold hitting $3,000 an ounce way before you ever see it dipping below $1,500 an ounce. So I think the best days are yet to come for gold investors.

… gold, as well as silver for that matter, have been historical currencies for thousands of years. In fact, we were on the gold standard in the US for many years, and the world was, the Western world was. What we’re seeing around the world is really a follow through from the 2008-2009 crash, where we saw consumers and businesses heavily indebted,. All that happened in the intermediating years is the government stood in and they were the spenders of last resort, and so the risk was transferred from the household sector to the corporate sector to the government sector.“

George Maniere stated in an article on the site Minyanville:

“I want to address some reports from the media that gold at $1,600 an ounce and silver having reached a high of $50 an ounce are in a bubble. I will go on record right now and say that this is nonsense. A bubble is not determined by price. A bubble is created by a run-up that is not supported by fundamentals. I remember back in 2000 during the dot-com tulip mania hearing a radio ad for a company called Seashells.com. It said just go to its website and purchase seashells. This was madness. I immediately called my broker and told her to dump my tech portfolio. What ensued was a very heated discussion that ended with my threat of pulling all my accounts from her company and filing charges with the SEC. She sold my tech portfolio while the Nasdaq was at 4,700, and several months later I watched as it cratered to 3,600 and in 2003 around 1,500.

That was a bubble. There was no fundamental reason for these companies to be trading at the levels they were. It was sheer irrational exuberance. The prices of gold and silver based on the debasement of currencies are in my opinion very cheap. I will go on record right now and say that by 2015 gold will be $5,000 an ounce and silver will be $125 an ounce, and I have had some very smart people tell me that my projections are too low. What is and will continue to drive the prices of gold and silver up is the continued debasement of currencies as debtor governments look for ways to pay off debts with paper of lesser value. My recommendation is to keep buying physical gold and silver and to keep trading ETFs and mining companies.”

What do you think? Are precious metals in a bubble and if so, when will that bubble burst?