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The Daily Reckoning

Why gold is still a good investment

Gold has had a long run, but do you know anyone who has invested in it yet?

By Guest blogger / January 17, 2011

In this 2008 file photo, gold coins and bars are shown at California Numismatic Investments in Inglewood, Calif. Gold has had an 11-year bull run, but it has more room to run upward.

Nick Ut/AP/File

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Nothing much in yesterday’s market news…so we turn to a remarkable article that appeared in MONEY magazine, proving that MONEY doesn’t know anything about money.

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(MONEY Magazine) – Can you tell when a boom has turned into a bubble? One clue: When pop culture starts paying attention. The housing bubble, for example, brought both the TV show Flip This House and a rival on another network, Flip That House.

So if you own a lot of gold, you might regard a recent episode of Saturday Night Live as your first warning. In the opening skit, Bill Hader as China’s President Hu Jintao declares that Glenn Beck was right and that “my government should have bought gold. Unfortunately, all our assets were tied up in US Treasury bills.”

Back in the real world, gold is trading at about $1,400 an ounce, up from less than $500 five years ago. That’s a 23% annualized return, far outstripping the gains on stocks (1.1%) or bonds (6.1%). Fear is driving a lot of the rise.

MONEY has a point. But not a good one. When pop culture gets excited about an asset class – tech stocks in ’99 or housing and finance in ’06 – you know it’s late in a roaring party. It’s just a matter of time before the neighbors get mad and call the cops.

But the MONEY writer missed the point. Pop culture has to take the bubble asset seriously. Not as a joke.

The author admits that the magazine tried to persuade readers to dump gold last year at this time. That was a costly mistake. Gold went up nearly 30%. But it just shows how hard it is to get to the top of a bubble market.

Yeah, but gold is not in a bubble market. It’s in a bear market. It will turn into a bubble market later. So far, almost no one is at the party. Ask your friends, dear readers. Ask your relatives. How many of them own gold? Ask the cab drivers, the insurance salesmen, the auto dealers and the psychiatrists. Ask the readers of MONEY magazine. Do they old gold? Nope. It may have just completed its 11th year of a bull market, but people have still not caught on. They think there’s something weird about gold…something almost unpatriotic. It is as if you didn’t trust Ben Bernanke or something.

MONEY goes on to tell readers why they shouldn’t buy gold now.

Reason #1: “Bad economic news may not make you very much money. Good news could crush you.”