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Investment Course: Gold Bubble – Profiting From Gold’s Impending Collapse

Gold Bubble - Profiting From Gold's Impending Collapse

Invest in Gold Course Content


Chapter 1: Why Gold?

Understanding Gold’s Surge
Why the “Gold Bugs” Are Wrong

Chapter 2: Bubble Enablers and Precipitating Factors

Removal of the Fixed Price for Gold in 1968
Poor Market Performance and Capital Diversion
Currency Troubles
Emerging Market Growth and Demand
Hard to Value
Introduction of Gold ETFs
Former UK Prime Minister May Be Responsible for Gold Bubble
Illusion of Safety

Chapter 3: Signs of a Gold Bubble

Parabolic Price Increases
Massive Publicity
Extreme Expectations

Chapter 4: Gold Takes On…

Is Gold a Safe Haven During Recessions?
Gold versus Various Asset Classes: Ratio Analysis

Chapter 5: Price Analysis and Forecasts

Gold Bubble Anatomy: Is a Parabolic Spike Coming?
Gold’s Place in History: Elliott Waves
Price Target for Gold Collapse
Fibonacci Time Relationships

Chapter 6: What Does Gold Depend On?

Herd Mentality in the Stock Market
Are We Headed for Another Great Depression?
Market Cycle Predicts Recession
The Dangers of ETFs
What about the Dollar?
Emerging Market Troubles
Middle East Upheaval
European Crisis

Chapter 7: Calling the Top: Signs of Reversal

Lagging Mining Stocks Signal Reversals in Gold and Silver Prices
Bernanke and Buffett “Puzzled by Gold Rally”
Dollar Strength and Market Weakness
Declining Momentum
Big Guys Selling: “Smart” Money Leads the Way
Is the Commodity Run-Up about to Reverse Course?
Has the Bubble Popped?

Chapter 8: Ways to Profit from the Collapse of the Gold Bubble

Short Gold
Short Gold Miners
Options Strategies
Short Rare-Earths
Betting on History: A Gold-Platinum Pair Trade
Forget Gold, Buy Diamonds
Buy Stocks Instead
Buy Physical Property, or Invest in Housing Stocks?

Chapter 9: Other Investment Land Mines to Avoid

“Cloud Nine” Computing: Sign of a Renewed Technology Bubble?
Betting against Facebook
Is IPO Mania Warning of a Tech Bubble 2.0?
Netflix: Setting Up for Disaster



What You’ll Find in This Gold Investing Course

This book covers why gold has become so popular, what factors have allowed it to become so overvalued, what signs point to a speculative bubble, and how to profit from its collapse.

Chapter 1 launches our analysis of the gold bubble by asking the most basic question: Why gold? Knowing the importance of considering all sides and opinions, I have tried my best to present the standard arguments many have used for investing in gold. Understanding what arguments gold investors have used to support their claims helps put the gold theme in context, and gives us a better picture of the strong fundamental reasons and deep-rooted beliefs that gold investors have relied on to justify their decisions.

Chapter 2 presents the structural and precipitating factors that have allowed a gold bubble to form. It is one thing to know the reasons used for buying gold, but it is even more important to understand the specific events and contributing factors that have enabled a very risky asset bubble to form. Many stocks or investments have good reasons that may justify their purchase, but an asset bubble requires certain structural and emotional factors that enable a much larger speculative mania to take place. Identifying those enablers is the second step in determining the bubble’s size, scope, and potential peak. In other words, if we can uncover when and how the bubble began, we have a much better chance of figuring out when and how the bubble might burst.

After determining the forces behind gold’s surge in Chapters 1 and 2, we present an extremely thorough analysis of the many signs pointing to a gold bubble. Chapters 1 and 2 set the foundation for why a bubble in gold is possible, but Chapter 3 presents the many clues that signal that an actual bubble has formed. Breaking down the numerous signs of a bubble into four main categories, I have pointed to what I consider to be the most common characteristics found in nearly all asset bubbles—parabolic price increases, massive publicity, overspeculation, and extreme expectations. Applying them to gold, I then present very specific examples within each category of the bubble. After reading Chapter 3, readers should have tremendous doubts about the safety and future profitability of gold investing. Chapter 3 should convince readers that a gold bubble is almost obvious.

Once a gold bubble is essentially confirmed by the long list of warning signs and red flags discussed in Chapter 3, Chapter 4 discredits the claims made by many that gold is a “safe haven” during recessions. By discussing gold’s performance during the Great Depression and past recessions, Chapter 4 presents the case that gold is an “unsafe haven” and is wrongly relied on as a safe investment during deflationary periods. Chapter 4 also shows how overvalued gold is by comparing it to other asset classes and their historical relationship. By many counts, gold prices have increased far more than the prices of cars, houses, stocks, and other precious metals over the same time period. Gold prices may have had a good reason to rise, but prices have reached extremes—especially when compared to other asset classes.

Chapter 5 analyzes long-term gold prices, defines the stages of the bubble, and forecasts price targets for when the bubble collapses. Applying a heavy dose of technical analysis, Elliott Waves, Fibonacci time relationships, and seasonality patterns, Chapter 5 puts gold prices into historical context and shows why gold is nearing the end of a growth and decay cycle dating back to 1934. It should be shocking how well gold prices conform to the typical structure of a bubble.

Having established why gold is in a bubble, why it is set to burst, and what stage of the bubble we currently find ourselves in, Chapter 6 discusses the many outside factors that gold depends on, from stock markets to the U.S. dollar to emerging market troubles to Middle East and European upheavals. Since every investment ultimately relies on, or reacts to, outside factors and events, pinpointing all the determinants of gold’s future price-moves helps us better predict when the bubble will pop. Since gold’s popularity has soared to such a great extent due to poor stock market performance, Chapter 6 asks whether the fate of the stock market strongly influences gold prices, and why a fall in stocks or the onset of a recession could trigger the end of gold’s run.

Moreover, since gold’s massive rise has coincided with huge declines in paper currencies and arguments of the U.S. dollar’s demise, Chapter 6 presents the case of a dollar comeback and its implications for gold prices.
Perhaps the largest determinant of the fate of the global economy and the future of commodity prices, the strength of emerging markets is vital to the continuation of the bull markets in stocks, commodities, and gold.

However, a multitude of signs have been surfacing that show weakening emerging markets, especially in China and Brazil. Expectations have been so high for emerging market growth and demand that these highly troubling signs of a slowdown could mean the beginning of a global recession and the end of the gold bubble. Add to that the giant upheavals and revolutions in the Middle East and the European banking crisis, which could spiral out of control and drag the entire global economy into recession (or worse), and it is clear that severe risks stand in our way. Chapter 6 explains why gold will be affected.

After having established that a bubble is nearly certain and that its collapse is inevitable, Chapter 7 searches for the signs of reversal that warn of an impending peak. Up until then, the book discusses why there’s a bubble, why it will collapse, and what factors will influence gold prices; Chapter 7 discusses the signs that point to a developing peak—signs that show up as the bubble loses steam and prepares for a collapse.

Chapter 8 represents perhaps the most important aspect of this book for investors: ways to profit from the collapse of the gold bubble. Chapters 1 to 7 are extremely important for understanding why gold is in a bubble and how to best predict gold’s future prices, but Chapter 8 puts it all together to form a coherent plan for turning knowledge into money. By presenting simple short-selling strategies, complex options strategies, pair trades, and alternative investment ideas, Chapter 8 offers a substantial number of methods and approaches for profiting from gold’s collapse.

Chapter 9 looks beyond the gold bubble. Having presented readers with a very thorough description of the gold bubble, I offer Chapter 9 as an examination of other potential bubbles on the horizon: technology stocks, the IPO mania led by Facebook and the social media revolution, and Netflix, which has already seen a huge collapse. The case studies in Chapter 9 provide insight into how to apply the characteristics of a bubble to any popular theme. Readers can use what they learn from this book by applying it to future investment themes, spotting bubbles, and avoiding or even profiting from their demise. Gold is just one example of a bubble.


Chapter 1 – Why Gold?

To set the record straight, I am not arguing with the fundamental reasons behind gold’s move. I agree that the reasons why gold prices have increased make sense. Gold is a tangible store of value: It provides protection against inflation, and some even say it protects against deflation.

Gold is also a fear trade during times of uncertainty or panic. These are fundamental reasons that explain why gold prices should go up. The problem, however, is that while these characteristics justify the rise of gold prices, they do not justify the extremity of the current gold prices.

In other words, gold went up for a reason, but it has gone up too far. The individuals who have invested in gold may have acted rationally, but their actions are not as favorable if so many others are persuaded to behave in the same way. Therefore, using these arguments to justify further increases in gold prices is no longer useful
because these fundamental reasons are already priced-in.

It is speculation of further price increases that runs the price of gold far beyond fair value. The fair market value of gold may be hard to pinpoint, but by definition, a bubble trades at prices well beyond where they should be based on historical average—or fair value.


Understanding Gold’s Surge

The reasons behind the gold surge are understandable.

Gold has historically been a store of value. Because people will always want more gold, it has been used as a form of exchange for thousands of years. With global acceptance and negotiability, gold is a first choice for many as a non-currency form of wealth. The more gold you own, the richer you are.

Gold is a tangible asset. At a time when the stability of stocks, derivatives, and other financial instruments are in question, gold offers a tangible and supposedly “stable” alternative. Gold is a hard asset you can actually hold in your hands.

Gold has limited supply. In order to increase the amount of gold in circulation, we have to mine it. Mines are obviously not limitless; there is a specific amount of gold in the earth’s crust, and when we deplete all of the earth’s gold reserves, supply will cease to grow. And if demand is continuous while supply is limited, gold prices are expected to keep rising. In other words, if more people demand gold and gold is a limited resource, the price of gold should rise.

Gold acts as a currency hedge. As the U.S. dollar has plummeted and as fears over the euro have escalated, because of uncertainties of the future of the Eurozone’s economy, gold has been perceived as a way to avoid the potential disaster that unfolds if “paper” money becomes worthless. When investors buy gold, they assume that should world economies fail, gold will still be accepted as currency.

Figure 1.1 shows how weak fiat currencies have been versus gold since 1999.
Figure 1.1 Various Currencies versus Gold since 1999 Source: Datastream, Erste Group Research.

Gold Bubble_ Profiting From Gold's Impending Collapse - Figure 1.1

Gold as a fear hedge. Massive debt levels, high market volatility, and a constant looming threat of economic collapse have all spurred the buying of gold as a protection against the worst possible outcomes. With the United States experiencing the worst unemployment situation since the Great Depression, it’s easy to understand why many investors have come to expect the worst. See Figure 1.2.

Figure 1.2 Percentage of Job Losses in Post–World War II Recessions, Aligned at Maximum Job Losses
Source: Business Insider, (6/3/11).

Gold Bubble_ Profiting From Gold's Impending Collapse - Figure 1-2

Gold as an alternative to equities. Following the stock market devastation we have lived through, from the bursting of the dot-com bubble in 2000 to 2002 and the collapse of the housing bubble in 2007 to 2009, many investors have almost completely lost faith in stocks.

But with a desperate need to increase their wealth in order to support their own lifestyles, pay for their childrens’ education, and/or fund their retirements, investors continue to search for some form of investment that will meet their needs. Out go stocks, in comes gold—if stocks haven’t worked, maybe a historically valuable, tangible, limited, and protective asset such as gold can.


Why the “Gold Bugs” Are Wrong

While these reasons are understandable, they don’t necessarily support the extent of gold’s surge. Yes, they do support gold prices going up. But who says they support a 600 percent move?

Rapid price run-ups tend to diverge from the underlying fundamental reasons for their move. In other words, as people start getting overly excited about a certain investment theme, they actually run the price up too far, too fast. Their reasons for jumping in may be accurate, but their enthusiasm pushes investors to actually get ahead of themselves. Prices can’t go up forever, and they eventually start to drop. And as more and more people start to realize this, prices plummet even faster. This marks the bursting of the bubble that will eventually see prices crash and many people worse off than before. And if gold is the current bubble, this fate awaits many people now investing in it.

Gold has a laundry list of great reasons to buy it. Gold bugs, apocalyptic doomsayers, and those who are discontent with government policy and volatile markets have all relied on gold’s historical value as a reason to own gold. Fearing the worst outcomes—the collapse of the dollar or a stock market crash—investors and much of the financial world have put their faith in gold, assuming its significance will provide them with a “safe haven” if markets and currencies collapse.

Rationally speaking, however, there is likely no such thing as a “safe haven” that could protect investors from plunging asset prices. Some assets, such as growth stocks or complex derivatives, are riskier than other assets, such as defensive stocks and high-rated, secure bonds; but if stocks and economies fall, all asset prices will fall together with them, including gold. Using history as a benchmark is a necessary and smart investment approach, but only when viewed by the perspective of price changes and sentiment.

In other words, using gold’s historical significance as a reason to buy it makes a lot of sense, but not if prices have soared to unsustainable levels or if those buying gold are too euphoric. Once an investment theme becomes “overcrowded,” it is no longer supported by history and fundamentals—it has become dependent on the psychology of crowds.

In the next chapters, we will explain which outside factors have enabled gold’s surge, why using gold’s historical significance is tremendously misleading, and how so many clues point to a gold bubble that is driven by fear, greed, and the need for stability.

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