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NostoNews, June 1, 2011
by Tommy Jasmin

Fools Gold

We are currently living in a bubble-driven economy. First the stock market bubble, then the housing market bubble, and now the precious metals bubble. The price of gold has doubled in the past three years. Everybody would like whatever it is they are investing in, to end up worth a lot more money, of course. If enough people start thinking this way, and believing it, regardless of the realities of the situation, it will start to happen, at least temporarily.


5 Year Gold Price Chart from kitco.com

So what's the problem? So what if there's a gold bubble? I feel silly having to remind anyone, but the problem is it can't be sustained. There is nothing real driving it, just a bunch of lemming-like fools. Eventually the bottom always falls out, and just like in Vegas, there are many more losers than winners.

I found a great article describing experiments economists were doing at universities, using students and real money. The researchers found that bubbles, and subsequent crashes, happened way more often than they would have guessed. Computer screens would clearly show how much a stock should be worth, but the price would always shoot way up over the expected value.

During one experiment, the professor pointed out the apparent insanity of what the students were doing, and that just made the stock price go up faster. It fueled the bubble even more. This is a result of the Greater Fool Theory. People figure there has got to be some greater fool out there somewhere, who will pay a little more.

Another cause, they determined, is people often really don't know what's going on - they just follow the crowd. The lemming effect, if I had to name it. And once things are in motion, like now with gold, silver, and platinum, it's hard to reverse course. Most investors don't know how to bet the other way - that prices are going to fall.


The malleable metal

Of course there are people out there like Jeff Nichols who will tell you this is no bubble and the "fundamentals" are sound and you should keep pouring your money into this market. But need I point out these are all people who have a vested interest in the bubble getting bigger? Does Sam Walton tell people to shop at Target?

A lot of the buyers lately are driven by fear. There's a lot of fear being imposed on us these days. Be worried! If people are worried about the dollar, the euro, inflation, they'll be more likely to buy gold.

Do I wish I would have bought gold before it doubled in price in 3 years? Of course, but really, to make "shoulda" speculations is irrelevant in my case. I don't have tons of money to throw around.

I have a few "woulda" realities, if I did have access to Uncle Scrooge's vault. I definitely would have bought stock in Netflix, that one I saw coming. And yes, eBay too. I was, in fact, running my own Internet auctions, via the Usenet newsgroup rec.arts.comics.marketplace before eBay made its debut. I was using the Mosaic web browser, watching web use double every few months, but never got around to writing that web-based auction software by the time I joined eBay in 1996. I did get around to writing price computation and collection management software, which I am still quite proud of and believe stands today in a class by itself. That stuff of course became this site, Nostomania.com. Excuse me a minute while I go wipe my ass with some toilet paper. Oh wait, that's Nostomania Inc. stock! Maybe I should put that back under the sink for the time being...

I'm no dummy (as far as I know), but I choose to divide my valuable time in many other ways, most without the intent to accumulate more money. I'd rather spend time with my little girl, and see a smile form on her face, than work 12 hour days.

I used to dabble a little with Monopoly money on E-Trade. For awhile, I thought, "hey, this is easy. And kinda fun". A few clicks, and a month later the family is able to take a vacation that year. Thank you Cisco and Oracle!

But after I got burned once, I called that quits and closed my account down. I was doing a fair amount of Java programming, and had Sun Microsystems on the mind a lot. When they dipped to around $7.00 a share, I thought, "how could this possibly go any lower? This is a no-brainer". A few clicks and I was locked into a downward spiral that ended up at around $3.75 a share. Oracle has since bought Sun.

But I digress.

Fear.

Yes, it's a big scary world. There really is stuff to be afraid of. But life is short, do you really want to spend it in a hermetically sealed... bubble? Me, I let my kid eat a little dirt occasionally.

The takeaway here?

Don't be a lemming. If you are fortunate enough to own a few chickens, don't put them all in one basket while running off a cliff.



If Liz says it, it must be true




Thanks, we'll see you all next month.

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