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Is gold a bubble waiting to burst?

Marketplace Staff Sep 1, 2010

Is gold a bubble waiting to burst?

Marketplace Staff Sep 1, 2010


Kai Ryssdal: Today’s rally in equities, and quite a rally it was, took a bit of the edge off gold. The shiny yellow stuff faded just a tad after getting to within $10 to its all-time high. Almost $1,250 an ounce at the close in New York. Depending on who you listen to, like this guy you’re about to hear, even at this price, gold’s a screamin’ buy.

Gordon Liddy: I’m Gordon Liddy and I want to share with you something that will protect your future in a very solid, very real way: Gold. It’s never too late to secure your future with gold. Gold is an intrinsically valuable liquid preserver of purchasing power that has held value for over 5,000 years. In these tough times, that’s more important than ever.

Yes, that was Gordon Liddy, the Watergate guy.

David Moon runs Moon Capital Management in Knoxville, Tenn. He’s not quite as big a fan of gold at $1,200 an ounce as Mr. Liddy is. Good to have you with us.

David Moon Good to be here Kai.

Ryssdal: Last year, about this time, when gold was touchin’ on $1,200 an ounce, it was all “Oooh! Gold bubble! It’s gonna crash soon, it’s gonna crash!” And then I read the other day, there are analysts saying it’s going to go to $1,500 an ounce. Whatever happened to the bubble talk?

Moon: Well, I was one of the people that was involved in the bubble talk, and I have been wrong about gold for so long, I know longer have any respect for my own opinion, Kai.

Ryssdal: Well, let me start maybe then by asking you why is gold different? I mean, it’s all the “safe haven” talk and “in times of trouble, that’s where people go,” but I mean, gold doesn’t do anything. It just sits there.

Moon: You’re exactly right. It was Charlie Munger, Warren Buffet’s partner, says that you take gold, you take it out of the ground in Africa, you put it on a boat, you ship it to the United States and you put it back into the ground in Kentucky. Ninety-five percent of the gold that’s ever been mined since the inception of human kind is still in existence. It’s still out there, it hasn’t been used for anything. Unlike silver or platinum or weapons-grade uranium, those are things that once they’re brought into existence, they’re consumed. Oil gets consumed. The only thing that causes the price of gold to go up these days is fear or greed. It’s the same thing that caused Internet stocks to become overpriced in ’98 and ’99.

Ryssdal: Why do we pay attention to it then?

Moon: We’ve become anxious. Our anxiety gets focused on things. The reason we pay attention to it is because marketing works. When Glen Beck and Gordon Liddy are on television everyday — I mean, don’t laugh at this. But if they were advertising timber, which is a much better natural resource, timber prices would be higher, at least in the short term.

Ryssdal: Are there real macroeconomic reasons for gold being higher? Interest rates are at zero, you plow it into bonds and it goes nowhere. I mean, does gold make you any money?

Moon: It only makes money as long as people move their money into gold. There are micro-reasons that gold prices can go up, and that’s what you’ve identified. And that is, that as long as the Federal Reserve keeps the risk-free rate of interest at zero, then money is going to move into all sorts of risky asset classes, including gold.

Ryssdal: Are you buying this $1,500 an ounce figure we’re seeing?

Moon: You know what, I don’t have a target for gold. There’s no way to predict when bubbles will pop. It’s the reason that short-selling any asset is dangerous, because an overvalued asset can stay overvalued for a long long time. Could it go to $1,500? Absolutely. Could it stay at $1,200 for a long time? Absolutely. Keep in mind that even though the U.S. government fixed gold prices at around $18.50 through most of the 1800s, the world price of gold spiked around $18.60. And it took 110 years for the price to recover to that point. Whether or not you make money in gold, as much as anything else, depends on the price that you pay for it.

Ryssdal: Are people ever going to get over it? It’s historically ingrained that we want gold just because it’s gold.

Moon: There are several things that are culturally, historically ingrained in us that we want. And most of those are ingrained for emotional reasons, and none of them are very healthy. And I’ll leave it at that.

Ryssdal: David Moon, he’s the president of Moon Capital Management in Knoxville, Tenn. Talking about gold. Mr. Moon, thanks so much for your time.

Moon: Good to talk to you.

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