One of a few recent articles about whether gold is a bubble appeared in the Wall Street Journal last week, “Is gold the latest bubble?”. From the WSJ article,
Second, before we assume the gold bubble has hit its peak, let’s see how it compares with the last two bubbles — the tech mania of the 1990s and the housing bubble that peaked in 2005-06.
So far gold has followed the same path as the previous two bubbles. And if it continues along the same trajectory — a big if — gold today is only where the Nasdaq Composite Index ($COMP) was in 1998 and housing in 2003.
In other words, just before those markets went into orbit.
Maybe I’ve been taking the wrong tack with gold, trying to make money on a pullback. Maybe I should just embrace the bubble while hedging against the inevitable bursting of it. As long as it remains cheap to hedge GLD (currently, using the optimal put options as determined by Portfolio Armor, the cost of hedging against a greater-than-20% loss in GLD over the next six months is less than 0.9%), maybe going long gold while hedging is the way to go.
That’s essentially what Mark Cuban did during the dot-com bubble. When his company was bought out by Yahoo!, he hedged. He was probably one of the few founders who got enormously rich during the dot-com boom but didn’t give most of it back during the bust. Presumably, an individual investor who went long dot-com stocks in ‘98 and hedged would have done pretty well too (even better, probably, had he dumped his Internet stocks after, say, the first 30% of the bust and held onto his hedges a while longer before selling them).
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