Bubble Behavior?

This is a confession. About a week ago I caught myself starting to get caught up in the hysteria currently surrounding precious metals. As I was browsing the online store of a bullion company, looking at silver coins, it dawned on me; am I participating in bubble madness?!

Back when gold was under $1,000 and silver was wallowing in the $13-14 range, I was content with the small amount of precious metals I owned through the Central Fund of Canada (ticker symbol CEF- split evenly among gold and silver bullion) and a few assorted coins. It was enough to diversify out of equities and the dollar somewhat, but not to the extreme where I expected society to collapse at any moment. Just last week though, with gold and silver hovering near $1,200 and $20 respectively, I suddenly felt the urge to consider adding more. Then, as I thought back to the principles of Graham, I realized how illogical my thinking was.

I like to poke fun of market bubbles and the people who perpetuate them, many of whom end up buying high and selling low. Last week served as a good reminder of how incredibly easy it is to fall in this trap though.

“It’s different this time…”

So goes the dangerous reasoning that ensures that bubbles happen repeatedly. And who knows, maybe it is different this time. Maybe gold is headed for $2,000+ in a matter of months, $5,000 by the end of next year, and hindsight will tell me I’m mistaken for not buying now. That doesn’t change this fundamental fact though- those who become more attracted to investments as the prices rises are doomed to eventually lose big. That’s like rushing to the store to load up on cereal because the price was jacked up. Ridiculous, right? Investments get riskier as their price rises and less so when the price falls, but we often act in the exact opposite of this truth.

The problem is that the “it’s different this time” argument sounds more and more appealing as the bubble continues to inflate. We fear that we’re missing the boat. The market gets more press time, further making us want a piece of the action. It starts to seem fail-proof. The fundamentals between $1,200 gold and $1,000 gold a few months ago weren’t that much different; a weakening dollar, an ever-growing federal deficit, financial industry worries, central bank gold-buying, etc. But more people want gold now than they did several months ago mostly because it has been thrust into the spotlight, even though it’s riskier now than it was earlier. If it’s not already in a bubble, my prediction is that this self-perpetuating cycle will continue until it does pop somewhere down the line.

I heard a commercial for some gold company claim- “with gold is setting record highs, there has never been a better buying opportunity”. I wonder how many gold coins they’ve sold with this completely backwards reasoning?

If you were bearish tech stocks in ‘99 or housing market in ‘04, you might have been considered loony at the time. Fast forward to today, and now you seem like a genius. Could the same thing happen with metals?

Thankfully I came to my senses before I bought anything. In fact, I decided to take a small profit on some (but not all) of my CEF holdings- about 17% in roughly 16 months. If it turns out we are in a bubble, I’ll get to reenter at a much better price. If metals continue their incredible run, hopefully I can avoid doubting my decision to sell and safely ignore the growing frenzy.