From the October 2013 issue of Futures Magazine • Subscribe!

Is it a bubble or bull market?

The gold market during the last decade comes to mind. Here’s a market that grew more than 650% within a decade. But it probably wasn’t the move itself that defined the bubble; it was likely the behavior that propelled the action.

When gold was trading under $1,000, per ounce, experts expected it to go to $3,000, or higher. According to a Fortune magazine article on Oct. 12, 2009, when gold futures were trading at $1,045, top-ranked manager John Hathaway of Tocqueville Gold Fund offered the prediction that gold could rise to more than $5,000. The traditional reason for the forecast was inflationary fears, but like stock prices that rise in a bubble because of implausible views of the future, gold prices do the same. Dire predictions of social unrest, political uncertainty and the collapse of the dollar caused prices to soar. By the end, many pundits were giving lip service to the “bubble” word. If judged by the technical pattern alone, gold’s run certainly looks like a bubble (see “Get some gold,” below). However, when the psychological picture is assessed, the analysis could go either way.

By the end of the price run, Utah passed a bill allowing gold and silver coins issued by the Federal government as legal currency. Utah was the first of 13 states to propose such laws. What the law did was to treat gold and silver coins issued by the U.S. Mint as legal tender for a set value as opposed to market price of the physical metal. For instance, if you had a one-ounce coin worth a one dollar face value, and gold was trading at $1,400 per oz., the value of the coin would be the currency value and not the market value. If someone wanted to buy a candy bar with a coin really worth several hundred dollars, they could do it.

This kind of behavior supports the notion that gold indeed was a bubble. However, the key consideration is that market participants deny a bubble even exists. By the time the precious metals started turning down, there were numerous reports that a bubble had burst. Indeed, while prices were rising, there were also numerous sources suggesting precious metals were forming a bubble. When a real bubble materializes, few, if any, “experts” admit the possibility that mania has set in. 

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