Notes From the Fieldby Martin Weil

November 16, 2011

Boom Town – Elko NV

Way back in 1996, the then Fed-head Alan Greenspan uttered the famous and prophetic two words to describe what might be going on in the US stock market – “irrational exuberance.”  For me, and many others, it was definitive confirmation that a bubble was inflating stock prices. Of course, the stock market bubble continued for a further four years, until it ended badly in March 2000.

This “Boom Town” podcast from Planet Money, to my mind, provides early confirmation similar to Greenspan’s in 1996, this time about the rise in gold prices. Note that I want to stress the word “early” in the previous sentence. In the four years after Alan Greenspan’s speech, the S&P more than doubled, from 650 to 1500 before falling steadily to 800 two years later.

The moral? Investors lucky enough to get in early in a bubble and get out before prices roll over can truly make a fortune. Most early investors however don’t get out before the crash, but still make money as they bought early and at low prices.  Maybe they don’t make the killing they were dreaming of, but they do ok. Late investors, and these are in the majority, can find themselves buying into a peaking market only to lose a considerable portion of their investment when prices collapse.

How to know when gold prices are peaking?  My own “tell” may be when the skeptical town leadership of Elko, featured in the story, caves in to the lure of rising gold prices and builds itself a new City Hall or similar major public infrastructure.

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