The gold bubble is yet to come

Is there a bubble in the gold market? Must be, says one reader. Just turn on the TV during the day and you'll see hours and hours of ads from agencies offering to buy gold from you pop it in an envelope, send it off, and next thing you know you'll get back an envelope full of cash.

But this mild level of public interest is not evidence of a bubble, not least because it invites people to sell, not buy, gold. It's more a sign of a growing awareness of gold, which adds weight to the idea, suggested this week by Socit Gnrale's Dylan Grice, that we're in the boom stage of a possible Kindleberger cycle for gold.

We've written on this many times before the cycle comes in five stages.

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First the 'displacement' a big change of some sort.

Second the 'boom' when a convincing story about the asset in question begins to gain traction.

Then comes 'euphoria' where greed takes over and everyone piles in.

Next comes 'crisis' insiders sell, prices fall, a rush to the exit kicks off and the real misery starts.

Finally we have 'revulsion' when no one will touch said asset class with a barge pole.

Gold has had its displacement (a financial crisis followed by an epidemic of money-printing), and it now seems that a nice story explaining why it should keep rising in price is gaining hold (see nearly every issue of MoneyWeek over the past five years for details on this).

Grice has added to the story with a neat valuation idea (which sounds silly but is, as he points out, no more so than the stupid "market cap to clicks" metrics we used in the tech bubble).

If you look at what gold price it would take for every US dollar issued to be backed by America's holdings of gold, you will have an idea of where the gold price might end up, he says.

So what is this price? $6,300 an ounce. Sounds ridiculous, doesn't it? But that's bubbles for you. They are, by definition, ridiculous.

Not all fund managers are much into gold. Even those who are tend to be loath to suggest holding more than 5% of a portfolio in anything precious-metal related.

That's why we like Sebastian Lyon and his Personal Assets Trust. Not only does he hold around 10% of the portfolio in gold, but in the fund's most recent Interim Management Report he reserves the right to raise his "holding of the virtuous metal". But Sebastian and his investment trust (with a TER of 1.1%) reflect our thinking in more than just his gold holdings.

If I were to recommend one fund that pretty much sums up the way we would invest just now, this is it. Personal Asset Trust is well out of financials and cyclicals, and mainly in strong international stocks (Nestl being a good example), which can provide the "dividend certainty in the difficult economic environment" its managers expect over the next few years.

Makes sense to us.