A bubble (sometimes called an asset bubble, financial bubble or investment bubble) exists when the market prices of assets in a particular class far exceed those assets’ true value. These inflated values are unstable and eventually fall dramatically.
Dozens of bubbles have inflated and burst over the course of history. While some bubbles appear to be one-time events, certain industries have seen bubbles form repeatedly, with investors seemingly never learning from past mistakes. Let’s examine a few of these industries and what appears to make them bubble-prone.
Precious Metals
In times of economic turmoil, many investors view precious metals as assets with intrinsic, long-term value. In the past, gold was used as currency or was used to back the value of paper currency; today it is not legal tender in the United States, but it still has valuable uses as a commodity in jewelry making, ornamentation, dentistry, electronics manufacturing and medicine because it is attractive, malleable and durable.
Throughout history, gold prices have largely been stable. Its average price per ounce in 1833 was $18.93. Its price hardly budged until 1919, when it moved up slightly to $19.95 an ounce. Through 1967, its price rose and fell incrementally, reaching a peak of about $35. In 1968, the U.S. government decided that its paper currency would no longer be backed by gold, and the metal’s price began to rise markedly. In the late 1970s, gold prices began to increase rapidly and by 1980, they spiked to $615.00 an ounce, but quickly fell and largely hovered in the $300s for the next 20 years. Not until 2006–2007 did prices return to the 1980 high; in 2011, gold reached over $1,500 an ounce.
Like gold, silver is also considered a safe store of value during difficult times. It also has numerous uses in both industrial and consumer goods. Since 1975, there appear to have been two bubbles in silver: one that peaked at $49.45 in 1980 and one that began in the late 2000s and was still inflating at the time of publication. After the sharp 1980 increase, silver’s price fell to around $5 by 1982. It hovered around this level until 2004 when it began to climb again.
Precious metals must be mined from the earth; they cannot be manufactured. Some metals are rarer than others, but in general, their limited supply helps to support their prices. Precious metals can also act as a hedge against inflation.
New Technology
Investors throughout history have become overly excited by the prospects of new technology. You know what happened with Internet stocks in the late 1990s and early 2000s, but do you know about the technology bubbles that preceded the dot-com bubble?
The railroad industry provides an early example of a new-technology bubble. The first railroad began operation in 1825. In the 1840s, a rapid run-up in the prices of railroad company shares began. The average price of railroad shares doubled in the United Kingdom over a three-year period; a crash ensued in October 1845.
A telegraph bubble followed the railroad bubble. In his book, “Pop! Why Bubbles Are Great for the Economy,” Daniel Gross writes that from 1846 to 1852, the United States saw an increase in telegraph miles from 2,000 to 23,000. Too many lines were built, causing prices and telegraph companies to tank, with the exception of Western Union. Investors in companies such as the Illinois & Mississippi Telegraph Company and People’s Telegraph lost large investments.
There are some indications that green technology (such as solar panels, wind mills and biofuels) and social media (such as Facebook, LinkedIn and Groupon) could be the bubbles of the future. Goldman Sachs valued Facebook at $50 billion in January 2011; in June 2011, CNBC reported that the company could be valued at $100 billion in a 2012 IPO. Both categories of new technology promise to change the world and have investors in a frenzy despite being relatively new and unproven.
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