Three Reasons Why Gold Is Overvalued

The past few months have put gold in the spotlight, and for good reason. The metal has shot up from below $1,000 per ounce in 2009, all the way to its current levels above $1,500. As markets around the world continue to falter, gold has seen a massive amount of inflows as it has long been the popular safe haven investment. Now that the Swiss franc is pegged to the euro, many consider gold to be the last remaining safe haven, as the once strong franc will now be dictated by the movements of the drowning euro. But with gold seeing its price nearly triple in the last several years, many investors are formulating strong opinions as to whether or not the precious metal is overvalued and due for a huge correction in the near term [for more gold news and analysis subscribe to our free newsletter].

In the current market environment, equities are exhibiting extreme volatility, and bonds yields are at an all time low, forcing investors to find their returns elsewhere. With so much instability, and the strong returns that gold has posted, it makes sense that it has surged in popularity over the last three years. Yet, as the commodity continues to climb, it has become clear that it is overvalued by some metrics. Below, we outline the specific reasons why gold’s price is inflated, and what makes this asset class one that investors need to keep their eye on for bubbles in the near future:

1. Gold is Gold is Gold

Let’s look at the facts. Gold is finite mineral that is considered a rare find, giving it such a high price per ounce. It does not pay dividends and it has no underlying benchmark, it simply sits in lumps in vaults all over the world. The past few years has not seen a massive change in the amount of gold in existence; if there were to somehow be a massive loss of gold around the world, it would certainly make sense to see its price skyrocket. Instead, the metal is just as rare today as it was 20 years ago, you could even argue that with all of the mining giants around the world that gold has become more abundant [see also Warning: Ignore Bill Gross’ Hard Money Prediction At Your Own Risk].

Nothing about gold has changed in the last few years, so why the massive appreciation in price? Any other commodity, like lumber or cotton, that saw this kind of exponential jump would be under major scrutiny. And cotton, in fact, did bottom-out after seeing its highest prices in history, putting it at the top of headlines for quite some time. Investor speculation and market scares have all contributed to gold’s meteoric rise, and if equities were ever to get their act together, gold would be in for a massive sell-off. Its price is held up by flimsy markets and a cloudy future, but if skies were to ever clear for our economy, investors would pile into equities, leaving the inflated gold to plummet.

2. Gold is Overbought

One of the most popular benchmarks for gold investment comes from the SPDR Gold Trust (GLD), an ETF that offers exposure to physical bullion. Looking at the average volumes of GLD, it is clear that the metal has been overbought as of late. In August of 2011, GLD had an average daily volume of 33.4 million, which is a huge increase compared to ADVs of 7.4 million and 9.8 million in August of ’09 and ’10, respectively. In fact, last month saw an astonishing increase in volume of over 244% from the previous year’s August and 351% compared to August ’09, leaving screaming evidence of the unnatural volumes in gold. Because markets have been so abysmal, gold has seen an extremely high amount of trading, but this is not the first time gold has seen this kind of move [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].

In 1980, gold prices experienced a very similar pattern that we see today. In the late 70′s markets dealt with inflation and tumultuous equities, while investors piled into gold, causing its price to jump from around $200 per ounce in 1978, all the way past $800 in 1980. With an exponential rise in gold prices, increasing fourfold in fact, the metal crashed in the subsequent two years all the way back below $400 per ounce, creating painful losses for a number of investors. Gold prices are exhibiting an eerily similar pattern today, as prices have jumped threefold since 2006 in an exponential fashion. If investors were to ever consider the phrase “history repeats itself”, now may be a good time to keep a close eye on gold.

3. Portfolio Rebalancing

As pointed out by Simon Oates from Financial Expert, gold may be poised for a loss simply based on the portfolios of a number of individuals and institutions alike. When it comes to portfolio allocations, a well-diversified basket of holdings is key, and that means that investors will try and spread their exposure across numerous asset classes. Commodities, like gold, are typically given a small portion of a portfolio usually ranging between 5% and 10% of total assets. However, for those investors lucky enough to have held a product like GLD over the last five years, they have seen not only massive gains, but now a major increase in their commodity allocations as well [see also The Guide To The Biggest Companies In Every Major Commodity Sector].

As a result, gold, an asset that is often meant for the “buy and hold” investor, now makes up a much larger percentage of many portfolios than what was originally planned. While investors are likely very aware of this, it is difficult to sell out of an asset that has multiplied so rapidly in recent years. Soon enough, however, it will come time to scale back on the now too-large commodity allocations and prompt a healthy rebalance. This could send gold for a massive drop as a number of investors sell out to keep their portfolio reasonably diversified and avoid putting too much in the precious metal.

Final Thoughts

One of the most important things to remember is that while gold may be overvalued, that does not mean that it is a bad investment, but is rather a factor to keep an eye on. It would be absurd to call gold a bad investment given its historic gains in recent years, but that also does not mean that it is safe at its current levels. For as long as market volatility persists, gold will be able to keep its high prices afloat, but when the day comes where equities finally break ground, this shiny metal will likely suffer a massive drop. When that will happen though, could be anywhere from one year to decades depending on who you ask. Instead, investors simply need to keep a close eye on their gold holdings, and be ready to pull the trigger if and when our economy pulls itself out of its downward spiral and confidence once again returns to the markets [see also Major Countries Burn Up Crude Reserves: Big Oil In Trouble?].

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Disclosure: No positions at time of writing.

This entry was posted in Asset Allocation, Commodity ETFs, Exclusive, Gold, Inflation, Precious Metals and tagged , . Bookmark the permalink.

Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

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  • Anonymous

    great post much appreciated information

    • Dark Templar

      There has never been a modern world situation where fiat currencies, escalating debt, and increasingly unbearable sovereign debts that have conspired to make fiscal irresponsibility the accepted norm across the majority the globes major industrial economies.

      This is the bubble that we should all worry about since there is no politically tenable solution to it. A global economic bubble burst is inevitable given ever weaker populaces that elect politicians who reflect their accelerating degradation standards of personal responsibility.

      What I find most amusing is how clever we are at kicking the can of our collective Waterloo down the road. Never underestimate human ingenuity! The fact that money is flying to the US dollar from the Euro demonstrates how short sighted money flows are. Apparently money managers are perfectly happy to fly out of the Euro pan into the dollar fire. Since, we a talking about very intelligent people, clearly these money managers feel that they will be able to jump out of the dollar fire before they actually get burned.

      I cannot predict the timelines of the global economic demise that is the collective inevitable outcome that our collective foolishness of this foolishness will earn, however you can pretty much take to the bank the fact that it will take longer than expected.  What will replace fiat currencies will probably be some sort of commodity based basket that has “real world” value and cannot be manipulated by governments hell bent on appeasing their increasingly degenerate populaces with a standard of living achieved though government distributed borrowed wealth.

      It is a certainty that precious metals will play an important role in any currency basket, but other core commodities that provide energy and much needed staple foods seem make a great deal of sense as well.

      One thing that does not make any sense is that fiat government currencies subject to hijack by irresponsible politicians should have any real world value. In the long run, a bitter fate is in store  for those who squander countries’ long term prosperity in return for their short term job security.

      Sooner or later, that political aristocracy they will meet the same fate that the monarchies of past received when the masses finally rebelled.  Let’s just say the the details of that revolt may be hard to predict, but it is sure bet that it is going to get very ugly. Don’t you think?

      • Bongstar420

        We all owe it to ourselves to pay ourselves back when we borrow money from ourselves because we will go broke if we don’t pay ourselves back when we borrow our own money from ourselves.

        Its all just permission to do things

  • Bill Belanger

    “If and when our economy pulls itself out of its downward spiral” says it all

    • Bongstar420

      The only “problem” is see with the economy is a class of over valued assets called “owners” who do not generate productive outputs.

  • Asddr23

    You need more for gold to collapse. Here are a few factors that would help push gold down a lot:
    1. Greece pays its debts.
    2. The PIIGS balance their budget and start paying down their huge debts.
    3. The USA balances its budget and reforms its entitlements (real reform needed).
    4. Central Banks around the world stop printing money and keep interest rates above inflation.
    5. The big Western banks become safe again.
    Until then, don’t sell your gold.

    • Bongstar420

      Or, humans could stop wasting money on shiny rocks used for ornamental purposes

  • T0928609

    Today is Dec.17 , Gold price is drop becoming compared its highest point . USD is gradually stronger more , Euro still no solution . Asset balance decide gold price ..

  • Anonymous

    When the Univ. of Texas board of Trustees took delivery of tons of gold bullion in the later ~2010 I perked up and stated to seriously accumulate a small position in gold; the ETFs made it far more convenient to take positions in the shiny metal (gold). I’ve been using it as a place to park money so it has been an erratic ingress and egress into the metal as the middle east blew up and Greece et al. blew up, too.
    More trading around the position than I would like to have done. 

  • EricTheRon

    You missed a big point as to gold’s overvaluation. Over the last few centuries, an ounce of gold has been worth about the same as a hand-tailored good-quality suit (usually wool). There are a few other general comparisons as well. Right now that puts gold around $1150 dollars/ounce at fair value, so it’s definitely overvalued.

    Of course, you are absolutely right that gold being overvalued does not always make it a bad investment. There are other factors right now holding up the price.

    • Bongstar420

      Shit, the suits are way over valued too.

  • Rexrander

    The simply understanding of supply and demand is a mandate here. The general population of the most populus country of the world has seen a steady and dramatic increase in expendable income. These people have demonstrated a continued desire to purchase necklaces, rings and all things gold. Now multiple that times 1 billion+ people. This is the initial CAUSE of the rise in gold price and it will not wane for decades. Gold will continue to rise in value as this demand will eventually reach a frenzy when the supplies become insufficient.

    • Bongstar420

      And their average IQ and educational levels remain low

  • edwierd

    if one is buying EFT, one is NOT buying gold. an eft is an eft is an eft. paper or more correctly, electrons in “the cloud”.
    buy gold. go down to your neighborhood coin/jewelry store, give the person behind the counter cash (they operate on a pretty thin margin and visa transactions hurt these little guys). take your lumps of actual shiny metal that you can hold in your grubby little fist home and lock it up in your safe and protect it with that other lump of metal known as lead.

    • Bongstar420

      Exaxtly the same as if we used Gold as the world currency…It would get issued as a paper note thereby making its dynamics the same as any other paper note- you have to believe and trust that your Gold note is in fact backed with a certain unit of Gold.

      There is not enough Gold for a world currency with a population of +8 billion people without issuing paper notes denominated in very small Gold units

      • Bilderberg CEO

        So what if it’s small units. It’s just a number.

  • Joey2127

    bull !  gold is up because of those tv ads buy gold..the dollar is worth nothing..but send me your dollars for my gold..remember my gold worth everything your dollars i worth nothing..something for nothing???????????

  • 45auto

    I see “edwierd” understands that lead as in bullets must be used to protect your gold and your life. Something even more important that bullets or gold will be realized in the near future with overpopulation soon to destroy the world as we know it and that is WATER!

    • Bongstar420

      I’m sure Mumps, Measles, and Chicken Pox (just to name a few notable instances) won’t trumped by “bullets”

      Yep, your better off as a moron with guns and Gold.

  • Stuart Bell

    I see the paper money going to zero, before gold will ever drop. Remember, Gold never goes to zero, and paper, well, that has gone to zero in many countries….I would rather own metals than the worthless paper…Just keep saying this paper we call money is worthless, it buys so much less than just a year ago… Good luck folks in whatever you do…

    • Bongstar420

      You assume valuable people want Gold…I don’t think that is a very safe assumption. Donald Trump’s Gold has much more buying power now than SHTF…..In the case of SHTF, Donald Trump’s Gold will garner him little say.

  • OnTheContrary

    Gold is not an investment: it is money.  In fact it is the only sound money with all major central banks committed indefinitely to bailouts and keeping the massive world bad debt overhang at bay.  Since it is money, is the standard by which all else is valued, and since it is capable of serving as a convenient currency (with electronic claims to tiny portions of the physical method) the value of all the gold in the world (which is actually quite a small mass, physically) is equivalent to a substantial fraction of all the assets in the world, and even if the world economy totally collapses, which is quite likely at this point, that will still be true.

    Although the price of gold has increased more than five fold over the last ten years, it has been rising only gradually for the most part, because, in fact, only a very small minority of funds or individuals with savings have allocated any substantial portion of their financial assets to gold.  The estimates are that the average allocation across all investment capital is substantially less than 1%.  At the height of the previous gold upsurge in the late 1970s, early 1980s (which BTW was no bubble, but simply rational behavior in the face of the looming threat of world hyperinflation) the average allocation was more than double what it is today, and the only reason the percentages didn’t climb into the 5, 10, 20% and more range was that inflation was nipped in the bud by one courgeous policy maker: Fed Head Paul Volcker. If there is any one like Volcker in a comparable position of influence today, I wish that someone would point him out.

    Hyper-inflation seems far away today to most people, but this is mostly because inflationary expectations have been fraudulently disguised by the U.S. Government’s manipulation of the statitistics underlying the CPI and other inflation measures.  Inflation has been running at less than 2% they have been telling us, and most people continue to believe that, even though their own costs have been going up much faster than that for years.  A better measure of actual inflation is the chart of the pre-1991 CPI published on economist John Williams’ ShadowStats website.  This shows that inflation has been running at 6% a year or better for the last ten years, and was far higher than the jimmied CPI for years before that.  The much higher price of gold is merely a belated recognition of that fact.

    Before we are through with this financial blow off phase, the fiat US$ is going to 0, and the price of gold is going to some multiple of tens of thousands of current dollars an ounce.  The only question is when.  IMO everyone who is managing assets should have at least a 5-10% position in gold, because once the metal really starts to take off it’s going to become harder and harder psychologically to buy it so much higher.

    • Bongstar420



  • Mike

    Gold hasn’t gone up; it’s the fiat that’s going down.

    • Bongstar420

      You mean your anti-government sentiment is causing Golds price to go up

      • Bilderberg CEO

        No, I mean the dollar is being devalued.

  • Gold_Price

    Gold will always have excellent value. We urge investors to closely track the gold price by visiting

  • RedScourge

    Just because there was a pattern similar to today many years ago, does not mean what happened then will happen now. Things happen for a reason, and that reason is not “because it has happened before”.

    In the simplest possible terms, gold is low when people have savings and no fear of them disappearing if they hold them in dollars. When this is not the case, gold is high. Argue about the details all you like, but this is what it all comes down to. We simply will not be seeing such a thing for at least a decade, and so gold is simply not going to go back down in the mid to long term.

    • Bongstar420

      Yep, the price of Gold isn’t mostly determined by subjective matters…because most of it is employed in objectively valuable tasks like as an oxidative shield for computers or as thermal radiation shields on a satellites.

      If, all of a sudden, only productive buyers were left to the market purchases with current market supply being unchanged, the price would plummet to far below the cost of mining. The Gold market is 90% uselessness

      • RedScourge

        There is a lot of stockpile in central banks and the like, but gold still has the same physical properties today that made it be money for thousands of years.

        Governments cannot easily debase gold in the way that the Romans once did, but they can debase their paper currencies. If the world were not running headlong into a mathematically inescapable problem of government debt and mismanagement, I would be very very bearing on gold indeed, but it seems a distinct possibility that we will see a return to a gold standard in my lifetime, which would send the price through the stratosphere.

        The only alternatives I see are politicians all of a sudden becoming trustworthy and concerned with sustainability, or the people suddenly becoming smart enough to use Bitcoin as their main currency, and neither seems particularly likely to me.

  • johanathan chill

    Very knowledgeable discussion here,
    you listing three reason for why gold is overvalued. very creative thought .

    Very Nice

  • Ainslie bullion

    Appreciable Post !!!

    Gold has always an excellent value.three reason for overvalued of gold in this blog are really very nice.

  • Bongstar420

    Gold is only of little value because it is mostly sitting in the possession of “rich” people not doing work.

    If Gold were mostly in average people’s every day goods like computers and cell phones where it would actually do productive things, it would be immensely valuable.