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Is Precious Metals Investing A Bubble?

03/14/2012 05:21 PM ET

Is Precious Metals Investing A Bubble? - Although prices precious metals have been climbing over the last decade and reached a record in mid-2011, and investment demand is expected to stay strong in 2012, there might not be a bubble to worry about, according to analysts.

Recently market watchers have been weighing in on the question of whether or not gold may be heading into bubble territory, and the debate has been heated. Charles Gibson, director and mining sector head at Edison Investment Research in London, says “I see no chance of that whatsoever, given all of the quantitative easing in the US in particular.” As long as US interest rates are negative, says Gibson, upward pressure will remain on the gold price, which he doesn’t see changing in the short to medium term.

Not exactly known for being a gold bug, in a recent Berkshire Hathaway (BRK-A) letter to shareholders, Warren Buffett named gold as the major asset in a category of investments “that will never produce anything” and are purchased with the hope that someone else will pay more for them in the future, which he compares to the tulips in the 17th century.

With gold, he says, purchasers are often motivated by the belief that the ranks of the fearful will grow. Extra buying enthusiasm, sparked by higher prices, also attracts those who see the rise in gold prices “as validating an investment thesis”.

“As ‘bandwagon’ investors join any party, they create their own truth — for a while,” says Buffett.

Referencing the tech and housing bubbles, Buffett writes that “an army of originally skeptical investors succumbed to the ‘proof’ delivered by the market, and the pool of buyers — for a time — expanded sufficiently to keep the bandwagon rolling.” But, he notes, “bubbles blown large enough inevitably pop.”

Edward Meir, senior commodity an,GDXalyst with INTL FCStone, says that while the gold price has been going up sharply in recent times, it has also posted notable gains over the last decade.

“If there is a bubble, it would have burst a long time ago,” he says. He also added that people are looking to gold as a historically tested measure of value that can hold its purchasing power and protect the investor from inflation.

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