3 Myths That Will Pop the Gold Bubble

by: Charles Lewis Sizemore May 6, 2011

All eyes are on gold, as the yellow metal has just dipped below the psychologically-important $1,500 level. Major high-profile speculators — including George Soros — now appear to be taking some of their bets off the table.

Investors now have a choice: Should they use the recent weakness as an opportunity to buy more gold or, like Soros, should they take their profits and move on to greener pastures?

The bullish case for gold is straightforward. The government is spending money it doesn’t have, and the Fed is doing everything in its power to weaken the dollar. Standard & Poor’s, in a classic case of closing the barn door after the horse has already bolted, added credence to this argument with its decision to lower its outlook on the United States’ AAA credit rating last month.

Still, investors would be wise to avoid gold, even after the recent pullback. Gold today is as risky as tech stocks in 1999 and Miami condos in 2005, and the arguments supporting its rise are every bit as flimsy.

Let’s take a look at some of these arguments and how they stand up to a brief reality check.

Myth #1: Gold is an investment

Let’s start with the very basics. I would define an investment as an asset that creates value and income over time. Stocks, bonds, real estate, and even livestock and productive machinery would all qualify. This is in contrast to “speculation,â€