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Why Gold Is Crashing

Stocks in this article: GLD DGL UGL NUGT GDX GDXJ

The invention and development of gold ETFs provided an easy means for individual and institutional speculators to trade gold without having to deal with the messy process of buying, storing and insuring the stuff for themselves. Most people who bought ETFs couldn't care less about gold the metal. For them, gold was simply another paper trading vehicle or source of paper "diversification."

What gold wasn't to these buyers, by and large, was something that they were actually interested in for gold's intrinsic worth as a commodity. Gold was being bought by them for essentially the exact same reasons that people have been buying Bitcoin: Pure speculation about doomsday scenarios, combined with a greed-laced ambition to capitalize on such calamities.

Indeed, if people had bothered to look at gold's intrinsic worth as a commodity, they would have never bought it in the past few years.

How to Spot a Gold Bubble

Gold has been and still is in a bubble by any objective measure. How can we tell? For several hundred years, the price of gold in real (inflation-adjusted terms) has remained within a certain range of the real (inflation adjusted) prices of other assets, such as consumer prices, soft commodity prices, industrial metal commodity prices, real estate prices, stock prices and the prices of just about every other asset you can think of. In other words, gold prices completely detached from its real-world reference points and economic reality in the past several years.

The real (inflation-adjusted) price of gold relative to virtually all assets is at the extreme upper end of its historical range. Historically, when this has happened, a crash in the gold price has been just a matter of time.

Now is the time.

Paper Gold

Ironically, hard-core gold bugs have been conducting an intense and concerted propaganda campaign for the last year to try to convince investors to sell their "paper" gold holdings via ETFs and futures and to buy physical gold. The reasoning of this cabal of gold marketers is that if enough people demand delivery of physical gold, they can trigger a run on the physical gold markets as the various counterparties will have to buy gold on the spot market to fulfill the call for physical delivery.

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