Gold rush at the shopping mall in Almere.

Today I was with my wife at a shopping mall in the center of Almere, The Netherlands. On the ground floor of the mall there was a small Gold Buyers pawnshop for old gold. I already had noticed it a few times before, but it had always been closed at the time that I was there. I wondered if anybody would sell their gold there.

Now I was at the same pawnshop at a much earlier hour; to my surprise I saw people queuing up there to sell their old golden jewels, precious coins and even golden teeth. It was a small gold rush at the shopping mall.

The small Gold Buyers pawnshop in Almere
Photograph by Ernst Labruyère
Click to enlarge

It reminded me of an observation that professor Kevin Depew, the savvy philosopher of Minyanville (www.minyanville.com) made a few times in his posts: if even the taxi-driver starts to talk about buying or selling gold, it’s time to step out of it, as the bubble is ready to implode. Well, concerning to the people at the shopping mall, this seems about now.

Still, gold was the best investment that I ever did too early.

The end of the last century was a time of conflicts in Europe: we’ve had the bloody war in Bosnia-Herzegovina that had finished a few years earlier and the outbreak of violence in Kosovo, which culminated in an NATO-attack on Serbia in 1999. At the time I had just read one of my favorite books one more time: ´Bullion´ by John Goldsmith about the gold bubble in 1979.

It seemed to me that gold would be a good instrument for keeping my savings. It was very cheap in those days, having with less than €10,000 per kilo the lowest price since 1979. I assumed the price would rise soon, as gold was like an insurance policy in times of uncertainty. Another reason was that when I bought gold bullion, it was not so easy to consume my nest egg and I would not spend it on useless things.

So I bought over time 300 grams of gold bullion, ignoring the amused and puzzled faces of the bank’s clerks; for me a small fortune at the time.

In 2000 I sensed that there was a dot.com bubble building up, also in The Netherlands: a Dutch company called WorldOnline, specialized in internet access and services, entered an IPO. The company targeted at a stock revenue that would equal an amount of €15,000 in projected revenues per subscriber. 

This was a totally ridiculous amount that the company would never earn in the future. I made a bet for a bottle of wine that the end rate of the first day at the stock market would be under the IPO price of the stock. I won gloriously.

The second sign of a dot.com bubble were the ridiculous prices paid by telecom companies during the frequency auctions for wireless mobile internet in 2000. These auctions in Germany, the UK and The Netherlands yielded a combined €89 bln (!) and for that money there was no antenna placed and no spade digging in the ground yet. 

My former colleagues considered me a perma-bear, when I predicted that the telecom companies would suffer dearly for this ignorant spending of investment money, as it was impossible to earn back. However, I was right within one year, as it brought some giant telco companies almost to their knees.  

But gold did nothing in those years, not when the dot.com bubble exploded and not even when George W. Bush recklessly attacked Iraq in 2003. And it still didn´t do anything when I asked my girlfriend Olga to become Mrs. Labruyère in 2004.

As I didn´t have enough money for the wedding, I decided to sell my gold. It had not yielded me money, but it had not cost me money either. Only one year later, in 2005, gold started soaring and it didn´t stop until it reached the level of €1350 per troy ounce in 2011, four (!) times the price that I sold it for. Do you think that I´m wrong when I consider gold being a bubble currently?

Gold price 1999-2011.
Chart courtesy of www.goldprice.org

Opponents of my opinion state that this high price for gold is due to the euro and dollar – both being fiat currencies without true collateral – losing so much in value and purchasing power that the current gold price is not a bubble after all. Even stronger, these guys think that gold might increase again until €2000/$2500 per troy ounce. If these guys would be true, it would mean that commodities, consumption goods, houses and everything else would also have increased in price with 3-4 times, since 2005. Suffice to say, they didn´t.

I don´t know whether the gold price will drop soon or not. But I have one tip for any investor: read the book Bullion by John Goldsmith and think of the people queuing at the gold shops. And then think again of your investment in gold. It might save you a severe financial headache in the future.