Why gold is an asset bubble ready to burst

by Michael Tarsala

Gold is an asset bubble and it’s already beginning to burst.

That’s the analysis of Mark T. Williams, a risk management expert, faculty member within the economics department at Boston University, and former examiner at the Fed in Boston and San Francisco.

Source: Stockcharts.com

It’s true, the price of gold broke its long-term trendline in March, and a major breakdown is now possible. The chart above is of the SPDR Gold Trust (GLD), which moves very much in tandem with spot gold prices. A break below support around $150 could send it tumbling.

But Williams’ analysis has little to do with the chart action.

Here’s why he said in the July issue of Financial Advisor magazine that the good-old-days for gold bugs are gone:

“It costs approximately $500 an ounce to mine gold, but currently this metal sells for over three times that cost,” he says. “Historically, the mining-to-market cost has been closer to 1.5 times.”

His point is that the fat profits are unsustainable in the long-term: It’s a signal that gold prices are simply out of whack.

I caught up with him this week and asked him to provide additional support to his thesis, and he made these points:

  • Other precious metals including silver and platinum are falling, too.
  • Depressed gold returns have pushed investors to look at historically more stable asset classes, including stocks and bonds.
  • The Dow has outperformed gold by a 2-to-1 margin so far this year; it’s the first time gold has underperformed the Dow in over a decade.

Put it all together, and maybe the “safety” of gold was never all that safe in the first place.