Gold Investing: Clutching at Straws?

Two years ago, gold investing was all the rage. But now, it’s all over. Apparently…
 
YOU KNOW the old saying, history never repeats, but it rhymes? asks Greg Canavan at The Daily Reckoning Australia.
 
Well, we’ve got a bit of rhyming going on in the markets these days. Take a look at this article on gold investing from the New York Times
 
“Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight. The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels.
 
“The rout says a lot about consumer confidence in the worldwide recovery. The sharply reduced rates of inflation combined with resurgence of other, more economically productive investments, such as stocks, real estate, and bank savings have combined to eliminate gold’s allure.
 
“Although the American economy has reduced its rapid rate of recovery, it is still on a firm expansionary course. The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators’ dreams into a nightmare.”
 
With thanks to Peter Schiff for digging out this gem, we should point out this New York Times article was from 1976, written just a few days after gold completed its mid-1970s correction, halving from a peak of nearly US$200 per ounce at the end of 1974.
 
The similarities with today’s mainstream commentary on gold investment are striking. We obviously don’t know if gold bottomed last week or whether there’s more downside to come. But we do know that gold is a very popular investment to rubbish right now.
 
Financial journalists, like hedge fund traders, find it easy to go with the momentum. When you don’t understand something, you let the price action do the talking, or the informing. So if gold has declined by nearly 40% over the last two years then it must be a bad investment, right?
 
So the journalist looks around to find out why gold is in such a rut. He or she gathers all the chestnuts and starts preparing the story: Gold doesn’t pay interest, the US economy is recovering, interest rates are heading higher, stocks offer a better long term return, gold just sits there and does nothing, etc etc.
 
All these arguments suddenly seem to resonate with people who bought gold simply because it was going up in the first place, without understanding why they actually owned it. Perhaps they owned too much. So they sell in a panic. But someone is on the other side of that transaction, buying as the price gets cheaper.
 
At some point it reaches a crescendo  –  the panic selling and the value buying  –  and the market finds a bottom. We don’t know whether the market has reached a bottom now or not. But we do know that there are many parallels to this gold market and the one in the 1970s.
 
Perhaps that’s just a gold-investing bull hanging onto a historical precedent to find comfort in an unknowable and murky future. Perhaps we’re grasping at the proverbial bunch of straws. But we do know we’ve been here before (in terms of the magnitude of the decline), and if you want to view any asset through the lens of history then it should be gold.
 
And while gold remains well and truly out of favour, the craziness on Wall Street continues unabated. This week, the infamous Winklevoss twins filed documents with the US authorities to establish the Winklevoss Bitcoin Trust, an exchange-traded trust fund seeking to raise $20 million to track the value of the virtual money phenomenon Bitcoin.
 
If this thing gets off the ground we’ll be amazed. But what is not amazing is the ability of the market to come up with this type of trash at or around market peaks. Financial engineers and/or Wall Street create products (meaning supply) to meet demand from investors with more money than brains.
 
You don’t try to launch this type of vehicle when there is a lack of confidence in stocks and markets in general. You launch it when people are confident and complacent, stocks are trending higher and when the perceived downside risks are very low. In other words, this is a sign the market is much closer to a peak than a bottom.

Greg Canavan is editor and publisher of Sound Money, Sound Investments, a weekly financial report devoted to unearthing great value investments amid today’s “money illusion” of fiat currency. Formerly editor of Australia’s market-leading finance newsletter, Greg has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse asLewRockwell.com and the Sydney Morning Herald.

See the full archive of Greg Canavan.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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