Gold & Oil Market Bubble

Last night I was watching the 700 Club and I heard some predictions: Oil reaches $200 a barrel, & gold reaches $1,500 - 2,000 per ounce. I remember about a decade ago, in the height of the internet/technology bubble, that some of my stocks were going to keep rising into the stratosphere. These comments last night, that we are going to double without a reasonable justification, sure did sound like we are in and approaching the top of a bubble.

Let's go back about 10 years. The belief was that the internet was going to keep growing at a tremendous rate. Companies based business models on this projected growth rate and people bought into it. The price of the stock relative to its earnings, P/E ratio, was at least 5-10 times a normal level. Stock prices of these darlings went up and up for a few years. I think this has been called building a castle in the air without a foundation.

What happened about a decade ago, the projection rates were much higher than reality. When reality hit, business models were not valid, companies could not meet expectations, some companies went bankrupt, and investors lost lots of money. Once it became clear that the future was nothing like what people believed, POP, lots of people wanted to sell. Unfortunately, nobody wanted to buy so the prices went down fast.

Some had a perception that the Federal Reserve System could somehow prevent another bubble. Is this true? No, it is impossible to regulate greed.

In fact, I think we are currently in the aftermath of a market bubble, sub-prime mortgages and the financial sector. Not to long ago the stocks in the financial sector, such as Citigroup, were the darlings and were going to keep rising. Now we all know that the financial sector is in trouble and we are in a middle of a mess.

If another bubble can not be avoided by the Federal Reserve, where is the next bubble? It appears that gold & oil are prime candidates. In fact all of the commodities that have had similar run ups, like copper & gas, appear to be in a bubble.

What do you do now if you believe we are in a bubble? For stocks, place a stop loss order, and keep moving it up, as stock prices increase. For a mutual fund that is particular to a sector, like energy or precious metals, you want to sell some and start diversifying into other areas.

The bottom line is to keep your portfolio in balance. Keep from getting over-weighted in an area that could financiall hurt you.