How to Dodge Bubbles

06/10/2011 1:13 pm EST


Joan Lappin CFA

Chairman and CIO, Gramercy Capital Mgmt. Corp.

Investors need to be patient and circumspect when investing nowadays, because speculation has gotten the best of an alarming number of rallies lately, says Joan Lappin of Gramercy Capital Management in this exclusive interview with

Joan, I want to ask you if you think we’re in a commodity bubble.

Well, I think that we have been through a series of bubble after bubble after bubble for the last 15 years.

We had the Russian bond default, which was something of a bubble. We had the tech wreck. We had the housing bubble. We’ve just had a long series of them, and the latest one is this commodity bubble.

So what are we going to do? What are investors to do?

I think you have to be very patient...become a patient investor. If you want to chase something like commodities, you have to understand that you need to be very fleet of foot.

And what you never want to be—with any investment that you make—is the last person to arrive at the party.

Okay, so looking at something like gold, or even crude oil?

As far as gold is concerned, it’s quite interesting. If you look at charts of the last, say, 30 years, going back to the early 1980s, you would find that from 1980 until about 2007 or 2008, gold was at $600 then and gold was at $600 three or four years ago. So you could have held gold for that whole 30-year interval with a zero return.

Even from four or five years ago to now, or say 2005 to now—would be a little more than that—even with the recent run up in gold, if you’d held it for the 30 years, you would have made about 150%. Divided by 30 years, that’s a very paltry return.

Now why is that? For most of that 30-year interval, central banks were selling their gold. It was only two or three years ago, if you recall, that the Chinese decided they wanted to bulk up on gold. They started buying, and then everybody else decided maybe this was a good thing to own

But gold doesn’t have a lot of commercial applications. It is mostly used for jewelry—and I think my car...I have to say, my ten-year-old Eldorado, which I think has gold-tipped spark plugs. But I think that’s kind of rare, and I think that on balance gold doesn’t really have a use.

You asked about oil, the way oil does. Oil is a different kettle of fish, because oil is used to heat homes, drive vehicles, fuel power plants to create electricity, and so on and so forth. And now, as the undeveloped world starts catching up with us, and having more cars, and wanting heat in their homes, and more reliable electricity than was the case in the past, they too are becoming consumers.

We of course in the United States pick up about 25% of all oil that is consumed, even though we are nowhere near 25% of the world’s population.

So, what you’re telling me is that investors looking at commodities should be very selective.

I’m not a commodity expert, other than to know that on balance, commodity markets until the last few years have been ruled by the people who bought those commodity futures to balance out their business.

It’s only been recently that speculators have gotten into the act, and you saw what happened in recent weeks, when the exchanges suddenly said, “Sorry, you can’t do this with very little investment.”

They raised the margins on silver.


That was almost back to the 1980s with the Hunt Brothers.

That’s exactly right! I love to tell a story from the 1980s, when I first started managing money at Manufacturers Hanover [now, after several mergers, a part of JPMorgan Chase (JPM)—Editor].

We were on 48th Street and 5th Avenue. For those who know New York well, 47th Street is the street of jewelers, and I remember when the Bunker Hunt thing was going on that I would go out at lunch time, and people would be running down 47th Street with their candelabras to cash them in.

Oh...sounds like “cash for gold” right now.


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