American Express have tapped into something. But what...?

IT'S AN OLD market fable. Joe Kennedy, on receiving stock tips from a shoeshine boy in 1929, knew it was time to get out of the market because clearly the top had been reached and the bubble was about to pop, writes Geoff Candy of MineWeb.

The story is wheeled out every so often when experienced investors believe that a particular asset class is in a bubble because, the implication is, when the uninitiated and uninformed begin to get in on the action prices go up without so much as a passing nod to fundamental values before eventually crashing back to earth.

One of the most recent applications of the story came in regard to the gold market and, more particularly, at the launch of a gold vending machine in Dubai. The timing of the entrepreneur who installed the machine at the Emirates Palace Hotel in Abu Dhabi couldn't have been better as it coincided with the yellow metal's dramatic rise through $1,000. 

Many commentators in the market, however, took it as an indication that the level of gold investment had reached a fever pitch and could have to come crashing back to earth sooner rather than later.

Since May 13, 2010 when gold fixed at $1,235.00, the yellow metal has continued its upward trajectory.

In line with the continued rise in gold prices in various currencies, calls of a bubble from the bear camp have got louder. And, one can't help but think that American Express's announcement earlier this week of a virtual gold trading game on Facebook, with a grand prize of £20,000 in "real gold bullion" will add voice to those calls.

On one hand a virtual trading game makes perfect sense, especially if at least part of your intended audience is used to spending hours in Farmville virtually reaping and sowing, or, indeed, possibly even mining virtual gold to help fund his or her next quest. But, it does beg the question, has gold become a legitimate reward again?

To the average Westerner, I would argue, gold, for a long time was rather anachronistic. Yes it looked good in jewelry form but, as an investment, it seemed clunky. It required at least a safety deposit box and, usually, a safe. Indeed, one of the selling points of ETFs, the staggering growth of which can be seen in the graph below, is the lack of "hassle-factor". The ability to own gold without actually having to take possession of it had a large appeal. 

But, while the growth of investment in ETFs has been rapid, one could argue that the loss of faith in financial institutions in the wake of the 2008 financial crisis and the ongoing economic calamity that is unfolding in both the US and Europe has been far swifter.

Which brings us back to the point about the value of gold. In a world where people are literally rioting in the streets in protest against the management of a country's finances – as in Greece – and politicians are arguing about the value of changing the constitution to get the country into more debt (America) have the ad execs at American Express just tapped into a bubble in the making, or, have they noticed that people, especially people in search of a new financial tool, are looking for something a little more permanent than cash?

If the answer is the latter, then gold bugs should be smiling because, given the parlous state of the global macro economy, there is every possibility that demand for the yellow metal is likely to continue upwards.

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