How to play the gold market bubble

published 30 September 2010

While we were asleep gold marched straight through $1,300, hitting $1,314 as Asian investors 'filled their boots'. So should you be joining them?

Are you unsure about gold? Are you worried about being the last person to jump on the bandwagon? Then I want to allay your fears. I want to show you why I don't think it's too late to get onboard the great gold bull. Better still, I'll show you what I think is one of the best ways to play it.

Why gold's got further to go

So why do I think it's a bubble? Because whatever happens to paper currency, I just can't see it being replaced by gold. Canyou?

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But gold will play on the hearts and minds of worried savers the world over. It may well end up 'backing' some new paper currency, or at least giving a temporary store of value until we get there. Whatever happens, gold will provide a focus, a magnet for paper currencies.

Right now our paper currencies are being debased and talked down. From Brazil to Britain, over to Russia, Japan and back round to The US of A, everyone's talking their currency down. A cheap currency helps exports and stifles imports. And that's what central banks and politicians want.

So while paper drowns, the yellow stuff floats to the top. Like a balloon held under water, there's only one way it wants togo. And I'm pretty confident there's some way to go before the balloon breaks the surface.

You can't value gold, but that won't stop them

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But I reckon we'll see some more adventurous valuation techniques coming our way. When we get nearer the top of the market, City analysts will have come up with some great new ideas on how to value gold.

I'm casting my mind back to the dotcom bonanza, how we all had to learn the new valuation rules: ratios involving eyeballs, clicks, visitors and users. Turnover and profits became a relic of bygone days; catchy ideas like 'first mover advantage' and 'market penetration' were more important than actually earning money. But I digress.

My point is that until we develop a new language and dubious ways of valuing that which can't be valued, then we're still some way off the last phase of the bubble.

Revealed: My new gold valuation technique

gold:investable wealth'

Not everyone in the world is rich enough to get their hands on gold. From the dark ages to our enlightened modern day, only the elite ever gets their hands on gold. That's the way it has to be. But the interesting thing is that today there are more people in that exclusive club than ever before.

The blue line shows how world population has boomed since theforties. Better still (for gold), the proportion of people wealthy enough to stake a claim on the metal is growing. With most of the globe having shaken off the idea of socialism, more and more people are chasing the capitalistic dream of wealth acquisition.

And if paper wealth is getting soggy, the age-old gold sanctuary is becoming popular.

I'm not going to put an estimate on the number of wealthy people in the world that can afford gold. I'll leave that to some well paid City analyst. When the time comes, he can put his name to the gold:investable wealth model.

The best way in

As gold goes up, these guys get the full benefit. They're selling into a bull market so turnover is on the way up, yet costs remain pretty stable. Profits go up and up.

Our resident 'gold guru' Dominic Frisby has written a compelling report on gold and gold miners.

Bear in mind that some of Dominic's tips are small speculative stocks that aren't producing gold yet; he believes in getting in early!

This article was first published on 30th September in the free investment email The Right side. Sign up to TheRightSide here.

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.