As the saying goes, “those who do not learn from history are doomed to repeat it.” Everyone remembers the tech bubble of the early 2000′s when a lot of subpar technology companies with no earnings traded at extreme valuations. Over the past few years we have gone through the real estate bubble in which home prices rose to unsustainable levels. To stay one step ahead of the next market drop, you have to watch for signs of a peak. Let’s take a look at a few markets where bubbles may be forming:
The Gold Market
Gold seems to take out a new all-time high every day. Gold prices are currently over $1,250 an ounce and investors cannot seem to get enough of the shiny yellow metal. The demand for gold only seems to be increasing as the price soars. Gold retailers, producers, miners, and sellers are all making a ton of money off of gold. Investors are buying gold for a few reasons:
- Gold is a hedge against inflation.
- Gold is a safe haven for investors during times of economic peril.
- Gold performs well when the US dollar is weakening.
Although all of these factors are bullish for gold, investors still need to be careful about a bubble forming in the gold market. Gold has had a huge run over the past few years and could be due for a drop. Any hint of deflation or economic stability is not good for gold. The gold party will be over once the big money leaves the gold market and some investors will find themselves still holding this illiquid asset once the music stops.
With so many expenditures financed by public debt, there is a danger that a bubble is forming in the treasury market. Global fears have caused both domestic and international investors to pile into U.S. Treasuries. While treasuries can be a good investment when yields are high, they are a terrible investment when yields are low. Investors started buying U.S. treasuries back in 2008 when the yield was practically nothing. Investors that rushed to buy long-term government debt at such low yields may regret their decision in a few years. Any increase in inflation or decrease in demand will increase the yield on new government securities. Investors with an appetite for U.S. debt should wait to invest until yields are higher.
There is great concern that a bubble may be forming in the one market that investors have looked to for growth for years: China. China is experiencing similar problems to the U.S. Both the U.S. and China have seen huge increases in home prices. While the United States has seen a major decline in housing prices, the Chinese property market has remained hot. Chinese housing prices have exploded and are valued at 13 to 14 times the average income. China has tried many tactics to put the brakes on its housing market and none have worked. Things in China sound eerily similar to the U.S. in 2006 with their bad loans, easy money policies and out-of-control property values.
When everyone is bidding an asset price up to new highs, it may be best to consider pulling out because you may be looking at a market top
(Photo credit: fdecomite)