Tuesday, August 16, 2011

Why Gold and silver are a bubble

Buy gold, buy silver, if you want to protect your savings...

Many years ago my father (we lived in Italy, with the lira, a currency with very high rates of inflation) used to say: if you want to protect the value of your savings, you should buy gold.
Or you should have bought real estate.
The prices of gold and real estate were the ones that always went "up".
In reality was the value of the Lira that went down.
But this was the way: if for a Kg of bread you had to pay 2000 liras and for the same bread 5 years later you had to pay 3000 liras, that meant you had an inflation of 50% in 5 years.
The same happened to gold and real estate.
More or less their value "upgraded" with the devaluation of the currency.
Sometimes you also had a bigger upgrade or a lower one, depending on the demand.
But for real estate you had for many years a good demand (from 50 millios people we became 60 millions, so we had 10 millions more people who needed a house) especially in the city, where many found a job in the new factories.

In USA you had a great demand for real estates till 2007.
prices grew exponentially because there was an exponentially growing demand.
The demand was inflated by the "propaganda" of a never ending demand and never ending upgrade of prices.

In 2007 the artificially created "demand" stopped and the prices slumped.

The same is happening to gold.
The value of the dollar is slumping, but NOT at the same rate the gold prices are upgraded.
From 600 dollars to almost 1800 dollars per ounce you have an upgrade in price of 1200 dollars in five years.
Nobody says that it is 300%.

Did the bread price upgrade 300%?
Did the cost of living upgrade 300%?

What upgraded the price was the "never ending“ demand.

The house value NEVER upgraded 300% in 5 years, not even in the bubble time...

Because the demand of real estate is basically "local".
( even though with derivatives they tried to make it international)
You can sell a house in US usually and mostly to US citizens.
While you can sell an ounce of gold EVERYWHERE in the world.

The price of gold WILL go up, and may be a lot.
But the "demand" will have an end, the moment there will be no buyers any more.

At that point, lucky the ones who bought it for 500 and sell it for the last price, unlucky the ones who believe in "never ending" upgrade.

In Italy we call it "catena di San Antonio" In US you call it Ponzi scheme.
Lucky the first who will buy and sell and very unlucky the last.
The amount of money is NEVER "burned".
The first ones get ALL and the last ones loose ALL ( and the ones in the middle earn a little bit and loose a little bit)

ALL what goes up too fast will come down even faster...

In the worst case scenario the dollar will be worth zero, that means it will loose 100% of its value.
If the value of gold follows much will it REALLY be worth?

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