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Thread: What Gold Bubble? - Janszen

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    Default What Gold Bubble? - Janszen

    What Gold Bubble?

    by Eric Janszen

    October 13, 2006

    I figure Friday the 13th is as good a day as any to take on everyone who insists on calling the price action in gold earlier this year a "bubble." Many commentators on gold believe that when gold hit $720 on May 11, 2006, gold was close to hitting its previous bubble peak of $850 on January 21, 1980. A new gold bubble had come and gone. For anyone who believes that, this Friday the 13th is not your lucky day.

    First, let's compare the 1980 gold bubble to the 2000 NASDAQ bubble.



    Long time readers of iTulip know an asset bubble when they see one. They are primarily belief systems that have the following five main ingredients:
    1. Extremes of popular, positive investor sentiment–the general belief that the price can only go up, such as gold in 1980, tech stocks in 1999, and housing in 2005.
    2. Valid Core Beliefs that are based on fact, such as the value of the Internet during the Internet bubble, that drive early adopters into the market.
    3. Invalid Apocryphal Beliefs that are later invented by those who are benefiting the most from the bubble, such as investment banks and venture capital firms during the Internet bubble, but readily accepted by everyone else who is also benefiting–to explain extreme price increases that go far beyond the level justified by the Core Beliefs.
    4. A well developed system of sales, marketing and distribution, that includes the mainstream press, and employs an army of analysts, consultants, lawyers, accountants, and so on, all of whom adopt first the Core Beliefs and later buy into the Apocryphal Beliefs.
    5. A duration that exceeds the warnings of early bubble spotters by months or even years.
    Gold in 1980, the NASDAQ in 1999, and housing in 2005 all fit the criteria for a bubble, and the results as shown in the chart above show a characteristic rapid price rise and decline that occurs during bubbles. Gold currently does not fit the criteria for a bubble.

    The reason I call my chapter "Gold for People Who Hate Gold" in americasbubbleeconomy is that the book is published by a major publisher, Wiley & Sons. Major publishers are interested in large audiences. The vast majority of readers, if they have any opinion about gold, have a negative opinion. They hate it. Thus the title. So, right off the bat, the first criteria for a bubble–popular, positive investor sentiment and the general belief that the price can only go up–is nowhere to be seen.

    To most people, gold still represents fear, hoarding, economic chaos, political and financial conservativism, and destruction of the environment, all of which they perceive as negatives. I'll call them un-goldbugs and today probably 95% of the population falls into that category.

    Goldbugs, in contrast, believe that gold represents honest money, protection from government confiscation of wealth via inflation, protection from economic and financial chaos, and political and financial conservativism, which they perceive as, if not all positive, at least good reasons to own gold.

    To many goldbugs, the government is, on a good day, confiscating wealth by gradually destroying the purchasing power of fiat currency, but may at any moment begin the process in earnest, as happened in the late 1970s, thus the 1980 gold bubble. Or the government may try to confiscate their gold, as happened in the US in 1933. They have also been expecting economic and financial chaos any day now... for the past several decades.

    In the book, I try to bridge the gap between the un-goldbugs and the gold bugs. I do so from the perspective of one who has traded in and out of gold during its ups and downs for several decades. Whereas goldbugs think now is always the right time to own gold, I make the point that gold is an effective hedge against losses during certain kinds of financial system risks at certain times. One of those times started in 2001.

    Goldbugs worry that central banks own gold and are therefore in a position to manipulate the price. While debate rages as to whether central banks trade gold in order to manipulate the gold market short term for their own purposes, as I mention in the book, central bank holding of gold long term is a reason to buy gold, not a reason not to. Central banks protest too much that gold has had no value as a monetary asset since the 1970s, such as when the chairman of the Bank for International Settlements (BIS) proclaimed in 1972 that gold without demand from central banks as a monetary asset was free to fall from its then fixed price of $35 to its true market price as an industrial commodity, "...around $7.50 per ounce." Eight years later, gold rose to peak at $850. Oops. Further, if gold has no value as a monetary asset, and is a mere commodity like cotton or copper, then why do they still own so much of it, over 25% of all the gold ever produced? Central banks have had over 30 years to sell it all off, and at a nice profit–a lot of "non-monetary" gold is on central bank balance sheets at $35, the price they paid for it.

    The reason they hold onto it is simple, and it is the same reason I bought a lot in 2001 and have since then recommended owning some gold since then: to hedge the risk that the current system may at some point enter into a chaotic period.

    Getting back to the idea that the rise in gold to $720 in May this year was the peak of a bubble and now gold has nowhere to go but down, let's take a closer look at the price of gold, but in real terms, adjusted for inflation.



    In the chart above, the price of gold is indexed to CPI inflation, using the purchasing power of the US$ starting at $1 in 1971 and declining to US$0.247 in 2006. When inflation is taken into account, the recent price rise is well within the range of price fluctuations for gold since 1983, after the gold bubble completed its regression to the mean.

    If and–in my opinion–when another bubble in gold happens, it might look something like this. The chart below shows a hypothetical future gold bubble.



    This is not a prediction that a new gold bubble will happen between 2009 and 2011. No one can say that. But you can "phase shift" this hypothetical future gold bubble years in or out from that date, and increase or decrease its peak and other characteristics of the bubble depending on a number of unknowable factors, and give yourself at least a way of "seeing" what is going on when it does happen. This is important because it is easy to get caught up in the Apocryphal Beliefs that will be expressed by everyone the bubble employs near the top–think investment banks in 1999 and realtors in 2005–so having a picture is useful to keep your head straight.

    The first thing you will notice is that the so-called May 2006 "gold bubble" appears on the chart as a small blip, like one you might have seen in the NASDAQ in 1996. The next thing you will notice is this second gold bubble greatly eclipses the 1980 gold bubble in nominal peak price. But, keep in mind it may only moderately exceed the previous peak in real (inflation adjusted) terms.

    Two other reasons why the recent $720 peak does not represent a bubble. One, that gold has to reach US$1,646 to even equal its previous 1980 bubble peak today. That means a 280% increase from today's price–right now. Forget $720. That's less than 50% of the previous "real" peak. Two, an asset bubble tends to peak well above the nominal price reached when it peaked before. For example, the DOW bubbled up in the early 1960s and in 1965 peaked at 944. It bubbled up again from 1998 to 2000, peaking at 11,497, and is making classic "echo-bubble" highs today–note the secondary peaks in the 1980 gold and 2000 NASDAQ bubble chart. Adjusted for future inflation, should inflation continue at its current rate and our hypothetical future gold bubble occurs starting in 2009, a nominal peak price around $2,500 is a fair target for a new bubble, which is a price I talk about in the book. But it's just an estimate. No one knows.

    The notion that gold has experienced a "bubble" recently is absurd. Do expect, as usual, a lot of volatility in the gold price. No market goes up in a straight line. To the central bankers who say there is no reason to own gold and that I, as an individual investor, should sell it, their suggestion reminds me of an old joke.

    A condemned man with a sack over his head and a noose around his neck is asked by his executioner to step onto the trap door. "Step forward." The condemned man starts to do so, then hesitates after he notices the man who gave him the order isn't moving. The condemned man asks, "Are you sure it's safe?"
    ________

    The Bullion Vault: Low risk, low cost, offshore physical gold ownership and trading for everyone.

    To find out what to do, order our book americasbubbleeconomy
    To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List

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    All information provided "as is" for informational purposes only, not intended for trading purposes or advice.
    Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
    Last edited by EJ; 11-21-06 at 10:40 AM.

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    Default Re: What Gold Bubble? - Janszen

    One question I've got about the recent stock and real estate bubbles that might inform a post-KA gold-bubble would be, how much do the changes in media in the last 20 years play into things?

    Do the 24/7/365 news cycle and 25-channel coverage of financial markets actual serve to reinforce both Core and Apocryphal beliefs? If so, have they/will they help to inflate bubbles well beyond what we've seen before?

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    Default Re: What Gold Bubble? - Janszen

    Great piece. The inflation-adjusted historical gold price series is pretty sobering.

    Only two comments:

    1. Sometimes, actually, the "doomsday" systemic disasters of the "goldbugs" do happen and few people acknowledge them as such.

    Recently I was looking at these predictions originating from the late 1970s, calling for "depression" in the 1980s. Putting aside high inflation, unemployment, and huge deficits, the 1980s were indeed filled with something very depression-like: bank failures. For the entire decade:

    http://br.endernet.org/~akrowne/econ...k_failures.gif

    These of course culminated in the S&L bailout. And as I probably don't have to say here, this all looks small potatoes compared to the current setup.

    2. I'm not sure you're fairly representing gold bulls' position regarding central banks' holding of gold. I have never heard of any "goldbug" saying it is bad if a central bank holds gold---if anyone is holding or buying gold, it contributes to a bullish case.

    The interesting objections I've heard regarding central banks is that they may be short-selling gold surreptitiously (i.e. bullion-bank lending). This would of course be a great way to shore up one's fiat currency (as well as pull in some more revenue without having to tax or borrow).

    Something fishy is certainly going on here, as sometimes it surfaces obviously. For example, we know that the Fed excused LTCM's 400 tonne gold short position (LTCM was acting as a bullion bank) in 1998. You have to wonder how widely this was going on, and what the extent of the remaining gold holdings are in countries with bullion-bank lending going on (most notably, the US).

    So this is different from either honestly holding gold or honestly selling it. Presumably a nation that feels its fiat currency is secure (especially internationally) wouldn't think too highly of gold, but also wouldn't want to appear to be publicly selling gold, as any "implied" backing would disappear.
    Last edited by akrowne; 10-13-06 at 03:29 PM.

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    Default Re: What Gold Bubble? - Janszen

    Nice one EJ, I like the way you characterize the "un-goldbugs". I've never quite emotionally understood the widely held negative opinions and even almost hatred of gold as an investment, while at the same time it is bought every day in large quantities in jewelry.
    Perhaps we could work out some marketing and branding games, and start selling Cisco and Microsoft and Dell Gold? ;)

    Anyhow, thought I'd add a few more charts in support of your points.
    The first is similar to yours, except I used a CPI adjustment the other way so that the 1980 gold peak shows as about $2100, also added in a correction to bring the understated CPI numbers since 1982 back closer to actual, and I also show 1973-75 gold bull market as well as what gold did when the stock market did its crash in 1987. The actual correction amounts are noted in the legend (400% inflation since 1974, 250% since 1980 and 200% since 1987).







    Then there's the very long term chart which shows a cycle where preferences tend to switch back & forth from hard assets like gold to paper assets like stocks. The peak in gold shows as a low in 1980 but basically means that about one ounce of gold could buy one share in every Dow stock. It took about 40 ounces in 2000 to do the same thing.





    Lastly, and kind of "out there" is a chart showing what happened to the gold price in pesos in Argentina earlier this decade. Most are unaware of what happened - basically, the Argentinian peso lost about 70% of its value in a very short period of time in late 2001 and early 2002.
    The basic reason I'm adding it here is both to show how closely the real value of a currency and gold can track, and also to show that gold never did come back down. The loss in peso value was a permanent one.
    Just in case too, I am *not* saying that the same exact 70% loss will happen to the dollar/bonar.



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    Default Re: What Gold Bubble? - Why is gold hated

    People love to hate things they don't understand - whats the percentage of the general public that used short-mutual funds to profit from the 2001-2002 Bear market - almost ZERO (I was among the ignorant masses) -
    Everyone over 50 remembers the big turn down in the price of Gold in the late 1970s without understanding why....
    And any one under 50 knows the WAY to wealth is Tech Stocks... ;-)

    Eric - Thanks for the education and lifting me above the masses - I think.

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    Default Re: What Gold Bubble? - Janszen

    gold *was* a bubble earlier this year, but the population involved in the bubble was small (maybe 3% of the total population?). among that population it definitely was a bubble.

    but it was also a coming out party. gold re-announced itself to the greater population. gold is emotionally training the public to believe.

    giant bubbles are pure emotion and they need time and persistence to build. each thrust in price brings in new participants as each new group joins in and begins to believe. each group creating its own mini-bubble. you can say gold of 1980 was a part of this one.

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    Default Re: What Gold Bubble? - Janszen

    Quote Originally Posted by bart

    that'd be the future gold/bonar chart.

    asked an argentine recently if after getting whacked over the head this way are many argentines buying gold? he said that average person got wiped out and has no money, and the wealthy ran to bonars. but he also said that recently wealthy argentines are in fact buying gold and euros. worried about the bonar, they are.

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    Default Re: What Gold Bubble? - Janszen

    Would you still say the same today ?
    Of is deflation leading gold to a (temporary) reversal ?

    Crawford Perspectives :
    GOLD is holding just below its
    own midpoint of the last few months at
    around $860 basis Dec. = Z. (chart not shown). The pattern remains in a general downtrend with lower highs and lower lows.
    about 896, clearly in Bear Market territory, chartwise. A break of $775-780 could be very negative, but current action already
    confirms the Commodity Bull Market is likely dead. The worldwide economic collapse pretty much nails that, for now.
    We have quoted THIS warning over the last few months:
    We have been Bullish on Assets in the Ground and particularly GOLD, METALS, OIL since April 4, 2001. We are now becoming a bit
    more skeptical about much more immediate continuation in the Inflation Hedges, looking instead for a few more weeks, and possibly
    months in correctional phases. The long term, multi-year Bull Market in REAL things is probably not over, but this correction is liable to
    be longer and deeper than previously experienced. We judged that the exponential blow-off moves were carried too far recently, and will
    require a more protracted retracement period in both time and price.
    Last edited by hellstan; 10-06-08 at 05:46 PM.

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    Default Re: What Gold Bubble? - Janszen

    I would say right now that the financial "industry" are concerned with raising US dollars so they can pay down debts and meet demands for redemptions, withdrawals, etc.

    That is temporarily bullish on the US dollar and bearish on EVERYTHING that isn't the US dollar.

    The cure for this disease is massive money printing...and the effect takes awhile. Once it is recognized for what it is, a massive depreciation of the currency will be under way and there will be days of US$100 and more up for gold and I think silver.

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    Question Re: What Gold Bubble? - Janszen

    Quote Originally Posted by EJ View Post
    What Gold Bubble?

    by Eric Janszen

    October 13, 2006

    I figure Friday the 13th is as good a day as any to take on everyone who insists on calling the price action in gold earlier this year a "bubble." Many commentators on gold believe that when gold hit $720 on May 11, 2006, gold was close to hitting its previous bubble peak of $850 on January 21, 1980. A new gold bubble had come and gone. For anyone who believes that, this Friday the 13th is not your lucky day.

    First, let's compare the 1980 gold bubble to the 2000 NASDAQ bubble.




    Long time readers of iTulip know an asset bubble when they see one. They are primarily belief systems that have the following five main ingredients:
    1. Extremes of popular, positive investor sentiment–the general belief that the price can only go up, such as gold in 1980, tech stocks in 1999, and housing in 2005.
    2. Valid Core Beliefs that are based on fact, such as the value of the Internet during the Internet bubble, that drive early adopters into the market.
    3. Invalid Apocryphal Beliefs that are later invented by those who are benefiting the most from the bubble, such as investment banks and venture capital firms during the Internet bubble, but readily accepted by everyone else who is also benefiting–to explain extreme price increases that go far beyond the level justified by the Core Beliefs.
    4. A well developed system of sales, marketing and distribution, that includes the mainstream press, and employs an army of analysts, consultants, lawyers, accountants, and so on, all of whom adopt first the Core Beliefs and later buy into the Apocryphal Beliefs.
    5. A duration that exceeds the warnings of early bubble spotters by months or even years.
    Gold in 1980, the NASDAQ in 1999, and housing in 2005 all fit the criteria for a bubble, and the results as shown in the chart above show a characteristic rapid price rise and decline that occurs during bubbles. Gold currently does not fit the criteria for a bubble.

    The reason I call my chapter "Gold for People Who Hate Gold" in America\'s Bubble Economy: Profit When It Pops is that the book is published by a major publisher, Wiley & Sons. Major publishers are interested in large audiences. The vast majority of readers, if they have any opinion about gold, have a negative opinion. They hate it. Thus the title. So, right off the bat, the first criteria for a bubble–popular, positive investor sentiment and the general belief that the price can only go up–is nowhere to be seen.

    To most people, gold still represents fear, hoarding, economic chaos, political and financial conservativism, and destruction of the environment, all of which they perceive as negatives. I'll call them un-goldbugs and today probably 95% of the population falls into that category.

    Goldbugs, in contrast, believe that gold represents honest money, protection from government confiscation of wealth via inflation, protection from economic and financial chaos, and political and financial conservativism, which they perceive as, if not all positive, at least good reasons to own gold.

    To many goldbugs, the government is, on a good day, confiscating wealth by gradually destroying the purchasing power of fiat currency, but may at any moment begin the process in earnest, as happened in the late 1970s, thus the 1980 gold bubble. Or the government may try to confiscate their gold, as happened in the US in 1933. They have also been expecting economic and financial chaos any day now... for the past several decades.

    In the book, I try to bridge the gap between the un-goldbugs and the gold bugs. I do so from the perspective of one who has traded in and out of gold during its ups and downs for several decades. Whereas goldbugs think now is always the right time to own gold, I make the point that gold is an effective hedge against losses during certain kinds of financial system risks at certain times. One of those times started in 2001.

    Goldbugs worry that central banks own gold and are therefore in a position to manipulate the price. While debate rages as to whether central banks trade gold in order to manipulate the gold market short term for their own purposes, as I mention in the book, central bank holding of gold long term is a reason to buy gold, not a reason not to. Central banks protest too much that gold has had no value as a monetary asset since the 1970s, such as when the chairman of the Bank for International Settlements (BIS) proclaimed in 1972 that gold without demand from central banks as a monetary asset was free to fall from its then fixed price of $35 to its true market price as an industrial commodity, "...around $7.50 per ounce." Eight years later, gold rose to peak at $850. Oops. Further, if gold has no value as a monetary asset, and is a mere commodity like cotton or copper, then why do they still own so much of it, over 25% of all the gold ever produced? Central banks have had over 30 years to sell it all off, and at a nice profit–a lot of "non-monetary" gold is on central bank balance sheets at $35, the price they paid for it.

    The reason they hold onto it is simple, and it is the same reason I bought a lot in 2001 and have since then recommended owning some gold since then: to hedge the risk that the current system may at some point enter into a chaotic period.

    Getting back to the idea that the rise in gold to $720 in May this year was the peak of a bubble and now gold has nowhere to go but down, let's take a closer look at the price of gold, but in real terms, adjusted for inflation.



    In the chart above, the price of gold is indexed to CPI inflation, using the purchasing power of the US$ starting at $1 in 1971 and declining to US$0.247 in 2006. When inflation is taken into account, the recent price rise is well within the range of price fluctuations for gold since 1983, after the gold bubble completed its regression to the mean.

    If and–in my opinion–when another bubble in gold happens, it might look something like this. The chart below shows a hypothetical future gold bubble.



    This is not a prediction that a new gold bubble will happen between 2009 and 2011. No one can say that. But you can "phase shift" this hypothetical future gold bubble years in or out from that date, and increase or decrease its peak and other characteristics of the bubble depending on a number of unknowable factors, and give yourself at least a way of "seeing" what is going on when it does happen. This is important because it is easy to get caught up in the Apocryphal Beliefs that will be expressed by everyone the bubble employs near the top–think investment banks in 1999 and realtors in 2005–so having a picture is useful to keep your head straight.

    The first thing you will notice is that the so-called May 2006 "gold bubble" appears on the chart as a small blip, like one you might have seen in the NASDAQ in 1996. The next thing you will notice is this second gold bubble greatly eclipses the 1980 gold bubble in nominal peak price. But, keep in mind it may only moderately exceed the previous peak in real (inflation adjusted) terms.

    Two other reasons why the recent $720 peak does not represent a bubble. One, that gold has to reach US$1,646 to even equal its previous 1980 bubble peak today. That means a 280% increase from today's price–right now. Forget $720. That's less than 50% of the previous "real" peak. Two, an asset bubble tends to peak well above the nominal price reached when it peaked before. For example, the DOW bubbled up in the early 1960s and in 1965 peaked at 944. It bubbled up again from 1998 to 2000, peaking at 11,497, and is making classic "echo-bubble" highs today–note the secondary peaks in the 1980 gold and 2000 NASDAQ bubble chart. Adjusted for future inflation, should inflation continue at its current rate and our hypothetical future gold bubble occurs starting in 2009, a nominal peak price around $2,500 is a fair target for a new bubble, which is a price I talk about in the book. But it's just an estimate. No one knows.

    The notion that gold has experienced a "bubble" recently is absurd. Do expect, as usual, a lot of volatility in the gold price. No market goes up in a straight line. To the central bankers who say there is no reason to own gold and that I, as an individual investor, should sell it, their suggestion reminds me of an old joke.

    A condemned man with a sack over his head and a noose around his neck is asked by his executioner to step onto the trap door. "Step forward." The condemned man starts to do so, then hesitates after he notices the man who gave him the order isn't moving. The condemned man asks, "Are you sure it's safe?"
    ________

    The Bullion Vault: Low risk, low cost, offshore physical gold ownership and trading for everyone.

    To find out what to do, order our book America\'s Bubble Economy: Profit When It Pops
    To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List

    Copyright © iTulip, Inc. 1998 - 2006 All Rights Reserved

    All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
    Not sure if I'm responding to this article properly, and am late to discussion, but, what types of investment vehicles are you talking about to position for future bubble? R you talking out of the money calls, efts or mining stocks? I have the ability to add slowly to this position over the next year. Is there still enough time?

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    Default Re: What Gold Bubble? - Janszen

    you're not too late... this article was written only 3 yrs ago... when gold traded 40% below today's price and gold was a 'bubble'.

    today every nitwit with an internet connection thinks gold's a bubble.

    some day they'll get it right.

  12. #12

    Default Re: What Gold Bubble? - Janszen

    Quote Originally Posted by metalman View Post
    you're not too late... this article was written only 3 yrs ago... when gold traded 40% below today's price and gold was a 'bubble'.

    today every nitwit with an internet connection thinks gold's a bubble.

    some day they'll get it right.
    huh? Seems everyone on the internet thinks gold is going to the moon! Going to 1500! 2000! 5000!

    I must be surfing a different internet than you Metalman.

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    Default Re: What Gold Bubble? - Janszen

    Quote Originally Posted by Crazyfingers View Post
    huh? Seems everyone on the internet thinks gold is going to the moon! Going to 1500! 2000! 5000!

    I must be surfing a different internet than you Metalman.
    You probably are. If everyone on the internet had this thought, gold market would be much bigger, than its current tiny size. When everybody and his dog thought dotcoms were going to the moon, everybody owned them (if not in a brokerage account, then at least in a pension plan). When houses were "the best investment", millions of people bought them. How many people you know actually own gold or related investments?

    I, personally, gave up on most of my friends and relatives, got sick of myself repeating they need to invest in gold. Even if some of them did, it is too little too late
    медведь

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    Default Re: What Gold Bubble? - Janszen

    Yes, Key manias regarding gold are not yet in place. The number of financially savvy people I know who own gold is virtually zero.

    I had lunch yesterday with a friend who is still holding some Krugerands from the 1980 gold rush. So he is someone who is, at least, aware of the gold market. He is sitting on the sidelines, mostly in cash, terrified of equities but also unconvinced that gold is anything but pure speculation.

    Back in the spring of 2006, I heard a little cocktail party talk about gold but not a peep since then.
    Greg

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    Default Re: What Gold Bubble? - Janszen

    Tough to do.



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