Has the gold bubble burst, or was the pot too small?

It can’t last forever. What goes up, must come down. It’s the law of averages. Whatever the adage, gold enthusiasts were getting an earful as prices slipped in October 2011.⁽¹⁾ The market had been admittedly hot, with just about every segment of society drawn into the luminous orbit of gold. From pensioners selling “heirlooms” to get cash for daily expenses, to “hip hop nation” fashionistas selling their chains at airport motels to brokers swooping in to find deals on the stuff already out of the ground, the price of gold skyrocketed to a 5 year high of $1900.30 in September 2011.

With market uncertainty inexorably high, and mounting international banking and trading scandals mounting, purchasing physical gold bullion or coins took on the aura of a magic talisman or tool. Like the Tardis, it was rumored to be bigger on the inside. When prices began to fall in October 2011, it appeared that the party was over, and those who had just gotten into the gold futures market were fuming.

That did not last for long.

All that gleams does appear to be gold. A number of analysts point to major sells occurring around that time period. Imagine that you got into gold five years ago for only $627.30 an ounce. Your paper portfolio lost almost 40% of its value in 2008. Retirement was just one year off. Or the first college-bound child was headed out the door. Or that dream home was finally within reach. There is always some volatility in the gold market due to gold to cash transactions, but September 2011 was a great time to cash out to cover any lingering losses and line a nest with more creative investments.

The bubble did not burst. It leaked a bit.

But all this talk of bubbles seems to hide responsibility. A better metaphor might be an empty stock pot. In the early half of the 20th century, it was still common for a household to keep a simmering pot of stock on the back burner of its stove. This pot of boiling bones and vegetable ends and pieces could always be found in a household steeped in the art of home economics. And if one inquired, certainly there would be bits and pieces of gold stashed for a “rainy day.”

This pot was on all day. The stock it produced was added to many different dishes. Full of trace minerals, amino acids and vitamins, it kept all family members healthy and strong. Keeping a never-ending pot of stock required the skill of an Alchemist, the improvisation of an artist, and the dedication of an accountant. It was a most unusual day for the stock to become the soup.

And this is what happened in October 2011. A lot of people rushed the pot at once, in need of a rich soup, but instead, they found increasingly thinner broth.

As of late December 2011, the price of gold has seen steady growth and as recently as today, Wednesday January 18, 2012, posted a monthly high of $1662.00. The tantalizing aroma is tempting, but hold on to your gold. Chances are good you’ll be able to make a five course meal in due time.

⁽¹⁾Kitco