Gold bubble will not last

April 22nd, 2011

Mark Williams is Executive-in-residence/Master Lecturer in Finance and Economics at Boston University’s School of Management. He is a risk management expert and a former Federal Reserve Bank examiner. He is also the author of “Uncontrolled Risk: The Lessons of Lehman Brothers and how Systemic Risk can still bring down the World Financial System.” He offers the following comments on the swelling gold bubble:

“At a time when everyone is rushing to buy gold it might be a good time to question such herd behavior. Investors take heed: gold price cannot climb to the clouds. It is at the late bubble stage and will soon pop. Gold bulls have enjoyed a decade-long ride, but as the economy moves from economic chaos to economic prosperity, the glitter of gold will fade.

“Investor obsession with exchange-traded gold funds (ETFs) has also created a false sense of liquidity and stability. ETFs have not been bear-market tested. Since 2004, when gold ETF’s were first concocted, over $60 billion has poured in, fueling higher gold prices. What is not understood is what effect ETFs will have on gold prices when global markets return to economic prosperity.

“As more investors want out than in, will ETFs become a giant wrecking ball? In 1980, during the last gold bubble, gold prices plummeted 60 percent in one year. That was before the advent of ETFs. Could the same derivative instruments that pumped gold prices up do the most destruction to gold prices?

“Using the last gold bubble as a guide, current gold per ounce could drop by $800 or more. Smart investors should get out of gold and take their money and run.”

Contact Mark Williams, 617-358-2789, williams@bu.edu

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