Top 10 Signs That Gold Is a Bubble: James Altucher

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As Europe's sovereign debt crisis rages on, uncertainty over the fate of the euro is making investors gaga for gold again. Considered a haven from currency volatility, gold's promise of safety from currency volatility makes it all the more attractive in unstable times.

But while its appeal is understandable, the precious metal isn't necessarily your best investment right now -- at least according to writer and hedge fund manager James Altucher, quoted in Business Insider.

As Altucher sees it, stocks are trading at low multiples right now, making it cheaper than usual to realize earnings on your investments. Compare that to gold: Currently trading near all-time highs, there may not be a whole lot of profit potential left before it peaks -- and peak it will.

Altucher presents 10 compelling reasons to believe that gold's bubble is about to burst -- here they are, in a nutshell:

1. Gold has very few industrial uses.
What's more, in the few uses it does have, gold could just as easily be substituted by silver, a far cheaper metal. It's a no-brainer for the economic industrialist.

2. Gold has no dividend yield.
Dividend yielding stocks enjoyed a renaissance of sorts this year, with investors realizing a simple axiom, summed up nicely by Altucher: "Buy a stock that consistently increases its dividend, and eventually, the dividend alone will pay back your investment." So might it make more sense to invest in a stable, high-dividend-yield company.

3. Gold has no earnings yield.
Corporate profits have been on an upward trajectory for over two years now -- so in Altucher's estimation, it may be more prudent to put your money into innovative companies with great potential for growth than in a yellow metal about to reach its peak.

4. The U.S. should start selling its gold to pay down its debt.
Gold prices are sky high, so Altucher thinks it's likely that we'll see the government start selling off its reserve to push them down, and keep the investing focus on stocks.

5. Interest rates are at zero and the Fed is printing money.
As the economy settles into stability, interest rates are sure to rise. This will almost certainly mean a stronger dollar -- and when the greenback rises, look for gold to fall.

6. Soros and Paulson can't carry the market forever.
When these investing gurus poured funds into gold, the world paid attention, and many followed suit. But as Altucher notes, they can't sustain that level of buying forever -- and in fact, Soros has already started reducing his position in GLD.

7. Gold production is rising.
And demand isn't likely to keep pace. 2009 saw a spike in gold production, spurring a shift in the ratio of supply relative to demand. China, the world's leading gold producer, is hellbent on seeing as much profit as possible before prices decline -- even if it means saturating the market.

8. Gold sentiment is at an all-time bullish high.
Case in point: The gold-dispensing ATMs popping up around the globe, headed for the U.S. Not only laughable, but impractical, as there's not a whole lot one can do with it. And as history has shown us, when bullish sentiment over gold reaches a certain level, it's almost always followed by a pull-back.

9. Assets in GLD, the Exchange Traded Fund that tracks gold prices, are also reaching a level usually associated with a top.
If past performance is any indication, this signals that its decline is imminent.

10. The Oracle is a huge gold bear.
If you're still unconvinced, take it from Warren Buffett, the great prognosticator: "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 ExxonMobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take?"

If you want to trade these trends, here are a few ideas. (Click here to access free, interactive tools to analyze these ideas.)

If you think Altucher is correct:
Exchange-traded funds that benefit from falling gold and metal prices:

  • ProShares UltraShort DJ-UBS Commodity (NYSE: CMD  )
  • ProShares UltraShort Gold (NYSE: GLL  )
  • ProShares UltraShort Silver (NYSE: ZSL  )

If you think Altucher is wrong:
Exchange-traded funds that benefit from rising gold and metal prices:

  • SPDR Gold Trust (NYSE: GLD  )
  • PowerShares DB Gold Fund (NYSE: DGL  )
  • Market Vectors Gold Miners (NYSE: GDX  )
  • iShares Gold Trust (NYSE: IAU  )
  • ProShares Ultra Gold (NYSE: UGL  )
  • SPDR S&P Metals and Mining (NYSE: XME  )

Interactive Chart: Click on the time line to evaluate the performance of the SPDR Gold Trust against the S&P 500 index.

Kapitall's Alicia Sellitti does not own shares of any companies mentioned.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (14) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 02, 2010, at 5:03 PM, AUricle wrote:

    Before you believe this, you might want to read THIS:

    A brief snippet;


    By Leslie Hook in Beijing and Robert Cookson in Hong Kong

    Published: December 2 2010 18:45 | Last updated: December 2 2010 18:45

    Gold imports into China have soared this year, turning the country, already the largest bullion miner, into a major overseas buyer for the first time in recent memory.

    The surge, which comes as Chinese investors look for insurance against rising inflation and currency appreciation, puts Beijing on track to overtake India as the world’s largest consumer of gold and a significant force in global gold prices.

  • Report this Comment On December 02, 2010, at 6:16 PM, kdeken wrote:

    All of this is old news. Older news is that gold has been an alternative currency for thousands of years. I don't think we have outgrown that yet. Disbelieve at your peril.

  • Report this Comment On December 02, 2010, at 6:53 PM, reggidmalc wrote:

    All Gold vs all Farmland vs all Stocks vs all Dollar bills are stupid arguments. When interest rates start to rise again I will have 10-15% of my retirement portfolio in gold/silver stocks plus a bunch of oil stocks and a bunch of ETF's holding stocks. This year gold and silver stocks have been my biggest winners. Bubble Schmubble.

  • Report this Comment On December 02, 2010, at 10:56 PM, Kazymandias wrote:

    > Before you believe this, you might want to read THIS:

    Standard commodity bubble talk.

    There is no question that this is a bubble...among the things the Fools left out:

    * This is the standard gold bubble pattern; during economic crises, gold temporarily increases in price, but it ALWAYS collapses again, lower than it had been before, at the first hint of recovery. The past decade was the weakest since the 1930s, so naturally gold had the illusion of being indefinitely strong.

    * The price of gold is being propped up by speculation, a standard bubble problem. Eventually, the speculators WILL either be scared away, or attracted elsewhere. There is nothing behind their speculation.

    * For example, gold cannot be consumed. As much as 85% of all gold ever discovered is still available, right now. The demand for actual gold has not risen, only the demand to temporarily invest in it...but with no growth to justify that.

    * "Gold has been used for thousands of years" is an argument that refutes itself. Ox yokes were used for thousands of years, too. Much of gold's old value, for example as a form of barter, is now outdated. The technology of modern monetary theory is far beyond such stone-age nonsense.

    > When interest rates start to rise again I will have

    > 10-15% of my retirement portfolio in gold/silver stocks

    I'm glad you will only lose 15% of your retirement.

    How much did you have in real estate/housing, in 2005?

    Here is an inflation-adjusted chart, showing how each gold bubble was triggered and burst by economic crises starting and ending:

  • Report this Comment On December 02, 2010, at 11:00 PM, rd80 wrote:

    Altucher's #5 is the main argument against a gold bubble.

    That's 0.000072 ounces of gold (or ten cents) for Foolanthropy.

  • Report this Comment On December 04, 2010, at 1:26 AM, InvestorSF wrote:

    So where exactly are the authors articles screaming that gold was about to take off in a way that the world had not seen in decades?

    Sorry, hard to take "sell" advice from someone whose "analytic" methods failed to call the bottom of an asset class about to take off.

  • Report this Comment On December 04, 2010, at 9:03 PM, dpdoor wrote:

    I agree. Look at history, gold went up in the 1929 depression then sold off soon after, Gold went up in the 1980’s Savings and Loan crisis then went to a price lower then the production cost. If the tend follows; it cost 500 an ounce to produce, gold could go to a generous 675 or below cost to 400.

    When they start dumping gold it will be like a the market crash, in fact it is the same growth curve that the stock market took before the crash. We are at the top, the return on investment is showing a half-life for the last 3 months; each month returns half of what it did the month before.

    Gold is the only commodity we will never run out of, 98% of all gold produced is still here. Gold is no longer the metal of choice with consumers, platinum and the silver colors are dominate in all fashion.

    If you ask anyone decorating or doing jewelry they laugh at you if you want gold.

    It is more cost effective to leave it in the ground and bring it up as we need it, the cost of storing gold is not prudent.

  • Report this Comment On December 04, 2010, at 9:58 PM, TuckerLehmann wrote:

    Very misleading title...Of the "10" , only #9 might be a sign of a bubble. The rest are more like the author's reasons why she thinks one should not be invested in gold. The article was a waste of my time.

  • Report this Comment On December 04, 2010, at 9:59 PM, TuckerLehmann wrote:

    Oops...I meant #8 might be a sign of a bubble.

  • Report this Comment On December 04, 2010, at 10:36 PM, dpdoor wrote:

    James, keep up the good work. Telling people something they believe in is wrong will ruffle a lot of feathers.

    If you look at my blogs I get 80% negative responses yet I nail my predictions 90% of the time and have double my 2007 portfolio’s value to prove it. Going short on gold somewhere around Christmas eve to early spring is a great long term investment. Boy will that aggravate the diminishing GLD investors.

  • Report this Comment On December 05, 2010, at 12:31 PM, nalex2010 wrote:

    Before people start "dumping" gold

    There are OCEANS of worthless pieces of paper called dollar bills that will be dumped first

  • Report this Comment On December 05, 2010, at 12:33 PM, nalex2010 wrote:

    #8 Gold is in a bubble ?

    Look at the charts for gold for the last 10 years and tell me if that looks like a bubble

  • Report this Comment On December 07, 2010, at 10:09 PM, dpdoor wrote:

    Uh, yeah it does look like a bubble. Just after your comment It had it's biggest drop in maybe 9 years and looks just like the market crash pattern. It could rebound to 1540 or it could go to it's target of 675 but sooner or later it will reach it's target.

  • Report this Comment On December 17, 2010, at 3:55 PM, DarkReaper wrote:

    You need to watch this James guy on Tech Ticker, to see how proven wrong he has been in the past. He is just another Cramer, disregard. He is a mouth piece for the FED.

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