The Ultimate Asset Bubble

By: David Nichols | Wed, Mar 10, 2010
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At the recent economic summit in Davos, George Soros -- the most successful hedge fund speculator of the modern era -- expressed his opinion that gold is "the ultimate asset bubble."

Naturally the gold community took umbrage with this idea. But rather than taking a knee-jerk defensive stance, I think it's important to understand what Mr. Soros is trying to communicate with this comment. He has amassed $13 billion through speculation, so his opinion carries some weight.

First off, it's important to recognize that his use of the word "ultimate" is in the literal sense, as in gold should be the last bubble market in an era of super-low interest rates. We've seen stock bubbles...a real estate bubble...then oil....and now, ultimately, it's gold's turn. That's what he's talking about. It's the last in a series of bubbles. It's not a slight on gold.

Plus Soros is right. Gold is in a bubble -- and it's is a good thing. Mr. Soros has generated the bulk of his wealth riding bubbles up and down, not getting too emotional about the underlying instrument. Because experience has taught him that bubbles are the most predictable, most profitable way to speculate. When capital becomes overly concentrated in one sector, recurring patterns develop, both on the way up and the way down.

My own exhaustive research into bubble patterns confirms this, in a much more precise way than I was anticipating when I first started the project. There is nothing even remotely close to the predictability of a bubble pattern in financial markets. It is the pattern for speculating.

Sure enough, it turns out that the Soros fund doubled its investment in gold over the last reporting period, and other ubër-speculators like Paul Tudor Jones and John Paulson have big bets on gold too.

But before we all drift off, starry-eyed, on that seductive "gold to $10,000" fantasy, we've got to have a reality check.

The buy-and-hold-forever strategy on gold might work -- I don't have any particular insight on what will happen over the course of decades -- but I do want to emphasize that an adamant buy-and-hold strategy over the next few years will cause you enormous pain and suffering.

Again, I have looked at every speculative bubble in the modern financial era, going back over 100 years, and they all share a unique structure that is astonishing in its precision. You can go back and check these bubbles on your own, or you can follow the easier path and sign up for a free trial to my Fractal Gold Report, and read my Special Report on this topic.

We even have a handy recent test case about what can happen in this situation. It would be hard to find a more compelling argument than the one supporting the recent bubble in crude oil, as the world is quite literally running out of the stuff over the very long term. Yet all those speculating on this long-term thesis got absolutely hammered by the recent bubble pattern, as oil dropped from $145 to $35 in six horrific months.

The good news for gold bugs is a similar blistering run higher is still ahead. But so is the inevitable collapse.

You will have to bail out with your "golden parachute" of profits at some point in the not-too-distant future, or you will see all of the gains wiped out. That's just the way it works. At the very least you have to hedge. Personally I'm planning on throwing some of the gains from the way up right on to the short side, when the time is right.

And according to my research on bubble growth patterns, the timing on this switch will be obvious. I already have a very specific time-frame for the terminal peak, and when it gets closer I fully expect to know the precise trading day when the initial reversal will hit.

I have written another Special Report on how these dates can be pin-pointed well in advance. You can read this too if you join on the free trial.

One final note: there is a major cycle date looming for gold next week, and these dates that occur in mid-to-late March tend to be highly-charged, bringing a huge burst of energy into the gold market. It's going to get much more intense from here.



David Nichols

Author: David Nichols

David Nichols
Fractal Gold Report

David Nichols

David Nichols publishes the Fractal Gold Report, a daily report covering the gold market using proprietary techniques that go beyond technical and fundamental analysis. The Fractal Gold Report is available by subscription here. Fractal Gold Report Disclosure.

David Nichols is a graduate of Yale University and a leader in the emerging field of fractal market analysis. This pioneering analytical approach studies the markets as chaotic, non-linear systems, addressing the predictability in financial markets. Fractal market analysis discovers the order hidden within the seemingly random chaos of the markets.

David is the editor of the Fractal Market Report and the Fractal Gold Report, daily subscription newsletters written in an easy-to-understand style that cover the markets using his proprietary techniques that go beyond technical and fundamental analysis.

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