Contents Cover Title Page Copyright Preface How I Reached This Conclusion What You'll Find in This Book As You Begin Disclaimer Chapter 1: Why Gold? Understanding Gold's Surge Why the “Gold Bugs” Are Wrong Chapter 2: Bubble Enablers and Precipitating Factors Removal of the Fixed Price for Gold in 1968 Poor Market Performance and Capital Diversion Uncertainty Currency Troubles Emerging Market Growth and Demand Hard to Value Introduction of Gold ETFs Former UK Prime Minister May Be Responsible for Gold Bubble Illusion of Safety Conclusion Chapter 3: Signs of a Gold Bubble Parabolic Price Increases Massive Publicity Overspeculation Extreme Expectations Conclusion Chapter 4: Gold Takes On Deflation Is Gold a Safe Haven During Recessions? Gold versus Various Asset Classes: Ratio Analysis Conclusion Chapter 5: Price Analysis and Forecasts Gold Bubble Anatomy: Is a Parabolic Spike Coming? Gold's Place in History: Elliott Waves Price Target for Gold Collapse Fibonacci Time Relationships Seasonality Conclusion Chapter 6: What Does Gold Depend On? Herd Mentality in the Stock Market Are We Headed for Another Great Depression? Market Cycle Predicts Recession The Dangers of ETFs What about the Dollar? Emerging Market Troubles Middle East Upheaval European Crisis Conclusion Chapter 7: Calling the Top: Signs of Reversal Lagging Mining Stocks Signal Reversals in Gold and Silver Prices Bernanke and Buffett “Puzzled by Gold Rally” Dollar Strength and Market Weakness Declining Momentum Big Guys Selling: “Smart” Money Leads the Way Is the Commodity Run-Up about to Reverse Course? Has the Bubble Popped? Chapter 8: Ways to Profit from the Collapse of the Gold Bubble Short Gold Short Gold Miners Options Strategies Short Rare-Earths Betting on History: A Gold-Platinum Pair Trade Forget Gold, Buy Diamonds Buy Stocks Instead Buy Physical Property, or Invest in Housing Stocks? Conclusion Chapter 9: Other Investment Land Mines to Avoid “Cloud Nine” Computing: Sign of a Renewed Technology Bubble? Betting against Facebook Is IPO Mania Warning of a Tech Bubble 2.0? Netflix: Setting Up for Disaster Conclusion Notes Preface Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Conclusion About the Author Index Copyright©2012 by Yoni Jacobs All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Jacobs, Yoni, 1986– Gold bubble: profiting from gold's impending collapse/Yoni Jacobs p cm Includes bibliographical references and index ISBN 978-1-118-23935-3 (cloth); ISBN 978-1-118-28309-7 (ebk); ISBN 978-1-118-28413-1 (ebk); ISBN 978-1-118-28702-6 (ebk) Gold Gold–Prices–Forecasting Investments Commodity futures I Title HG293.J25 2012 332.63–dc23 2011050803 ISBN 978-1-118-23935-3 Preface Someone with “perfect foresight” should have foreseen that the process was not sustainable and that an implosion was inevitable.1 —Charles Kindleberger Gold is in a bubble that is set to burst I sit and write this without a clue as to whether we've reached the top in gold or whether we're getting ready for a parabolic rise All I know is that gold is in a bubble, gold prices will come crashing down, and many people will lose a lot of money I write this book after a year of intense analysis of gold, commodities, emerging markets, the dollar, and the stock market After carefully, meticulously, and thoroughly analyzing gold prices since the 1880s, inflation trends, fundamental stories, chart patterns, investment behavior, news coverage, and a nearly endless amount of information from stock prices to economics to psychology—I boldly and justifiably claim that gold is in a bubble that is ultimately due to collapse and severely hurt the average investor I am not yet sure of exactly when the bubble will pop, though I have a few analysis-based guesses What I know, however, is that this book is an extremely time-sensitive matter; it must be made public as soon as possible While this book offers an extremely in-depth analysis of gold and all of its driving factors, the lessons learned within and the clues pointing to a bubble will likely serve as a tremendous benefit for analysis of future bubbles across a wide range of asset classes At the height of the technology bubble and again at the height of the housing bubble, Yale Professor Robert Shiller released the first and second editions of his book Irrational Exuberance—a prediction of an impending collapse in the markets due to extreme investor enthusiasm and unsustainable speculative bubbles Not only did Shiller make two of the greatest calls in market history, but his highly contrarian opinions were published despite the fact that the rest of the world believed the opposite: that technology and housing would continue to soar (though we now know they were all wrong) With gold prices up over 600 percent in 10 years, and with huge warning signs appearing that signal extreme investor enthusiasm, euphoric herd behavior, and an upcoming collapse to the Gold Bubble, I have written my own version of Irrational Exuberance But this time, irrational exuberance has appeared because of massive fears and extreme pessimism over the future of markets and the U.S dollar This time, gold is the subject of irrational exuberance To make matters worse, unlike in the case of technology stocks and housing, gold's historical significance has created an aura and illusion that gold prices will never fall Since gold has been used as currency and has been sought after by nearly every civilization for thousands of years, gold investors assume that investing in gold is “safe.” But with gold now an object of mass speculation and subject to herd-like behavior, we are not far from the day when investors realize that gold is, in fact, an “unsafe haven.” How I Reached This Conclusion After writing this book and putting all of the pieces together to form a coherent picture of gold's history and future, I cannot be any less than 95 percent certain that gold is setting up for a devastating fall All the evidence I see, all the strategies I have learned in spotting bubbles, all the technicals, charts, stories, and commercials show me signs of a bubble The entire world picture fits in almost perfectly with my view on gold I finally see how economics, currencies, stock markets, reserve rates, inflation, forecasts, commodities, time, and the consumer all blend together to form a coherent big-picture view of the markets and the world To further support this claim, I have supported my analysis by applying some of the most prominent works written by industry leaders and highly regarded analysts For studies of asset bubbles, speculative manias, financial crises, and their precipitating factors, I have applied Robert Shiller's bestselling Irrational Exuberance and Charles Kindleberger's Manias, Panics, and Crashes For analysis of Elliott Waves and growth/decay cycles, I have applied Frost and Prechter's Elliott Wave Principle For a better understanding of how different markets, sectors, indices, and asset classes interact, I have applied John Murphy's Intermarket Analysis Finally, for behavioral studies and investor psychology, I have applied Martin Pring's Investment Psychology Explained and Carl Futia's The Art of Contrarian Trading These books have not only provided a very thorough set of references, but have also strongly supported my analysis and claims of a bubble in gold In short, I have written a book because I have found a perfect example of a bubble—and one that I have followed for quite some time I have provided plenty of charts and images that may better explain what I'm writing about—I'm a visual person myself I have extended and further developed the gold bubble argument into a groundbreaking and ultimately accurate prediction at a time when the rest of the world is “irrationally exuberant” about the future of gold Finally, because the opportunity presented itself, I have followed this bubble, analyzed it even to my occasional disbelief, and written a guide to the impending collapse of the gold bubble I strongly think this book has the potential to become a foundational go-to guide for identifying bubbles and speculative manias What You'll Find in This Book This book covers why gold has become so popular, what factors have allowed it to become so overvalued, what signs point to a speculative bubble, and how to profit from its collapse Chapter launches our analysis of the gold bubble by asking the most basic question: Why gold? Knowing the importance of considering all sides and opinions, I have tried my best to present the standard arguments many have used for investing in gold Understanding what arguments gold investors have used to support their claims helps put the gold theme in context, and gives us a better picture of the strong fundamental reasons and deep-rooted beliefs that gold investors have relied on to justify their decisions Chapter presents the structural and precipitating factors that have allowed a gold bubble to form It is one thing to know the reasons used for buying gold, but it is even more important to understand the specific events and contributing factors that have enabled a very risky asset bubble to form Many stocks or investments have good reasons that may justify their purchase, but market cycle sector rotation of ETFs (exchange-traded funds): dangers of declining momentum of emerging market ETF industry gold prices impacted by gold vs gold miners' growth of high correlations due to homebuilders sector irrational exuberance in mutual funds vs., 109 options strategies on overspeculation via overview of physical gold/silver purchases vs short-selling “smart money” divestiture from stage of bubble introducing technology sector uses of Euro European banking crisis See also specific countries European Central Bank (ECB) Ex Oriente Lux F5 Networks Facebook: betting against bubble stage of failure opportunities for global dominance of IPO by Netflix competition via peaking popularity of price-to-earnings ratios of privacy issues for profit potential/revenue generation of secondary market trading of shares of success opportunities for user base of valuation increases for Fear hedge, gold as Federal Reserve, U.S.: Bernanke leadership of Greenspan leadership of monetary policy of Quantitative Easing program of Felix Investments Fibonacci time relationships Fifth waves Financial sector Fischer, Stanley Fixed gold prices Flip That House/Flip This House Fool's rally Forecasts: Elliott Wave Principle as basis of Fibonacci time relationships as basis of gold price of parabolic spike of price target for gold collapse seasonality as basis of Foreign currencies and markets See specific countries France Fraudulent companies Freeport McMoRan Frost, A J Futia, Carl Gartman, Dennis GDX ETF General Mills Germany GLD ETF Gold See also Gold bubble; Gold mining; Gold prices coin sales as currency hedge demand and supply of diamond purchases in lieu of as equity alternative ETFs as fear hedge gold-platinum pair trade historical worth of illusion of safety of investment warnings related to physical holdings of reserves of short-selling stock purchases in lieu of as tangible asset valuation methods for (see also Gold prices) vending machines Gold bubble See also Gold; Gold prices “different this time” attitude during extreme expectations signaling factors enabling and precipitating faulty historical comparison to herd mentality toward intolerance of opposing views about overspeculation signaling parabolic price increases signaling predictions regarding profiting from collapse of publicity signaling reasons for reversal signs of signs of stages of television signaling peak of timing of popping of U.K gold reserve sales launching Gold Bullion Act (1985) Gold Bullion Securities ETF Goldcorp Goldman Sachs Gold mining: employment gains in ETFs lack of mining company hedging lagging mining stocks signaling gold bubble reversal limited gold supply through profit-cost gap in short-selling stocks in speculative takeovers in television show on Gold prices See also Gold; Gold bubble asset class price comparison to bond price correlation to commodity run-up reversal in currency vs gold price fluctuations declining momentum of deflation impacting diamond-gold price disparities dollar inverse correlation to Elliott Wave Principle on emerging markets impacting European banking crisis impacting extreme expectations impacting factors impacting (see also entries for specific factors) Fibonacci time relationships on fixed forecasts of gold ETFs impacting gold reserve sales impacting gold valuation methods impacting hedging herd mentality impacting inflation-adjusted lagging mining stocks signaling reversal in market vs gold price fluctuation Middle East upheaval impacting options strategies based on overspeculation impacting parabolic increases in publicity impacting recessions impacting removal of fixed gold price seasonality of short-selling based on stock market correlation to target for collapse of uncertainty impacting Gold Rush Alaska, 26 Google Greece GreenCrest Capital Greenspan, Alan Groupon “Has the 500-Point Drop Confirmed a Great Depression 2.0?” Hastings, Reed Hazlitt, Henry Hedging: currency fear lack of mining company hedging Herd mentality Hoag, Jay C Homebuilders ETFs/stocks Housing bubble: 2007-2009 collapse of “different this time” attitude during emerging market homebuilders stock collapse during crash of Israeli publicity signaling real estate investments following recession following collapse of “Housing Bubble in Israel?” Housing stocks See also Homebuilders ETFs/stocks Hovnanian Hulu IDEX Diamond Price Index “The Impending Collapse of the Gold Bubble” India: economic slowing in emerging market changes in Facebook use in gold price increase in Indian rupees inverted yield curves in Indonesia Industrial and manufacturing sector Inflation: Consumer Price Index measuring currency devaluation due to emerging market historical levels of housing market impacted by inflation-adjusted gold prices interest rate adjustment to curb Insider selling Interest rates: central bank manipulation of housing market inflation rate higher than inverted yield curves of S&P 500 Inverted yield curves Investments See also Commodities; ETFs; Stock market to avoid (see also Gold) cloud computing diamond emerging market investment rate Facebook gold bubble collapse-initiated gold-platinum pair trades investment demand IPO mania and Netflix options strategies for real estate (see also Housing bubble) short-selling “smart money” stock technology sector IPO mania Iraq Ireland Irrational exuberance Irrational Exuberance (Shiller) Israel “Is the Commodity Run-Up about to Reverse Course?” Italy Japan Jones, Paul Tudor Jordan KB Homes Kennedy, Joe Kindleberger, Charles Kiyosaki, Robert Kraft Lennar Corp Libya LinkedIn Living Social Loan exposure Mansharamani, Vikram Market cycle McCarthy, Barry MDC Holdings Media Mexico Middle East upheaval Mining See Gold mining “Mining Stocks Signaling Reversals in Gold and Silver Prices” Minsky, Hyman Misek, Peter Molson Coors Molycorp Monetary policy: currency valuation impacted by emerging markets impacted by gold prices impacted by housing bubble resulting from Montgomery, Paul Macrae Morgan Stanley Mutual funds MySpace NASDAQ Neill, Humphrey B Netflix: accounting manipulation by business model transition for CFO resignation at competitors of failure predictions for insider selling of investment in option strategies for price-to-earning ratio of short-selling streaming content costs of streaming library weakness of technical weakness of stock valuation of Newmont Newton, Isaac Oil industry See Energy sector Options strategies Overconfidence in buying Overspeculation: coin sales signaling ETFs spurring gold bubble signaled by gold-related investments signaling gold vending machines signaling investment demand signaling lack of mining company hedging signaling massive public awareness signaling mining company employment signaling Molycorp CEO identifying physical gold/silver holdings dangers in profit-cost cap signaling speculative takeovers signaling Palladium Pandora Paul, Ron Paulson, John Phillip Morris Platinum Portugal Prechter, Robert Price of gold See Gold prices Price-to-earnings ratios Pring, Martin Procter & Gamble Profits: diamond purchases for Facebook profit potential/revenue generation gold bubble collapse profit opportunities gold-platinum pair trade for Netflix accounting manipulation of options strategies for profit-cost cap signaling overspeculation short-selling for stock purchases for Psychological feedback loop Publicity PulteGroup Quantitative Easing program Qwikster Rackspace Hosting Rare Earth Elements Rare-earth elements Real estate investments See also Housing bubble Recessions and depressions: 1929 stock market crash triggering copper and oil price decline signaling credit supply impacting double dips in fool's rally/dead cat bounce from gold prices during Great Depression vs Great Recession housing bubble collapse triggering market cycle predicting unemployment during RedHat Renren Reversal signs, gold bubble: commodity run-up reversal as declining momentum as dollar strength and market weakness as financial leaders' gold stances as gold bubble popping and lagging mining stock as “smart money” investment changes as Rio Tinto Riverbed Russia Ryland Group Salesforce.com Schiff, Peter Seasonality SEC Secondary markets SecondMarket Sector rotation, market cycle of “Sector Rotation: How Energy and Consumer Staples May Reveal a Contraction” Seeking Alpha Services sector SharePost Shiller, Robert J Short-selling: gold gold miners Netflix rare-earth elements Silver: commodity run-up reversal in gold price correlation to investment in, due to emerging market growth lagging mining stocks signaling price reversal in mining company employment gains physical holdings of price fluctuations in silver coin sales stock purchases in lieu of Sirius Skyscraper indicator SKYY ETF “Smart money” investments Smith, Mark The Social Network, 204 Soros, George South Korea S&P 500 Spain SPDR Gold Shares ETF (GLD) Speculation: extreme expectations fueling overspeculation signaling bubble speculative bubbles (see Bubbles) speculative investments to avoid (see also Gold) speculative takeovers S&P/Shiller Housing Price Index Standard Pacific Corp Starz Steel Stock market See also Dow Jones Industrial Average; NASDAQ; S&P 500 1929 crash of capital diversion from Egyptian Elliott Wave Principle in emerging market changes impacting emerging market decline of ETFs on (see ETFs) Fibonacci time relationships in fool's rally/dead cat bounce in gold as equity alternative gold bubble collapse opportunities in gold price vs market fluctuation herd mentality in high correlations in homebuilders ETFs/stocks on housing stocks on (see also Homebuilders ETFs/stocks) lagging mining stocks on market cycle of mutual funds on options strategies in seasonality of short-selling on uncertainty in “Stocks Are Approaching a Brick Wall?” Stokes, Martin Sugar Supply and demand See Demand and supply Syria Technology bubble: 2000-2002 collapse of asset valuation impacting cloud computing signaling renewed “different this time” attitude during IPO mania warning of renewed mutual fund investments during price-to-earnings ratios in Technology sector See also specific companies; Technology bubble cloud computing in Facebook in insider selling in investment in IPOs in market cycle sector rotation of Netflix in price-to-earnings ratios in secondary market trading in valuation increases in Television Templeton, John Tempur-pedic Tiffany Tilson, Whitney Time relationships, Fibonacci Time Warner Toll Brothers Transportation sector Trichet, Jean-Claude T Rowe Price Tunisia Twitter Uncertainty Unemployment United Arab Emirates United Kingdom: gold price increase in British pounds gold reserve sales by gold vending machines in University of Texas Unsafe Haven, 67 U.S dollar See Dollar, U.S U.S Federal Reserve See Federal Reserve, U.S U.S government debt See Debt, U.S government Utilities sector Vending machines, gold VMWare Volcker, Paul Wah Nam taxi company Wallenstein, Andrew Wall Street Journal, 26 Wal-Mart Washington Agreement on Gold Wedge Partners “What Can the Great Depression Teach Us about Our Great Recession?” Wheat “Why Inflation Isn't Affecting Gold Prices” XHB ETF Yemen YouTube Zales Zuckerberg, Mark Zynga ... www.wiley.com Library of Congress Cataloging-in-Publication Data: Jacobs, Yoni, 1986– Gold bubble: profiting from gold' s impending collapse/ Yoni Jacobs p cm Includes bibliographical references and index... 8: Ways to Profit from the Collapse of the Gold Bubble Short Gold Short Gold Miners Options Strategies Short Rare-Earths Betting on History: A Gold- Platinum Pair Trade Forget Gold, Buy Diamonds... of methods and approaches for profiting from gold' s collapse Chapter looks beyond the gold bubble Having presented readers with a very thorough description of the gold bubble, I offer Chapter