Gold ‘An alchemist’s mixture of fundamentals and fantasy’

by | Oct 9, 2009 | Precious Metals | 3 comments

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    If you’re thinking about investing in gold, consider The Wall Street Journal’s recent article by Dave Kansas Gold Is Still a Lousy Investment to make sure this investment is right for you.

    What drives gold prices? It’s an alchemist’s mixture of fundamentals and fantasy. Gold certainly has industrial uses and it’s a hot item for purchasers of jewelry, especially in India.

    Adding to the fundamental doubts about gold’s surge is the performance of other commodities. Wheat, corn, nickel, copper and stainless-steel prices have all declined from highs reached ahead of the global financial crisis. Gold, however, has simply marched higher with barely a pause, smashing through $1,000 an ounce early in September before a recent retreat.

    That brings us to the fantasy half of the equation, which seems to be the main driver of gold today. Gold is the asset class of choice for those who fear grim tidings ahead. A collapse in the dollar. Runaway inflation. Civic upheaval. Some gold bugs talk of stockpiling seeds, bullets and canned goods. It can get a little Area 51.

    As with many fantasies, there’s a whiff of possibility to some of these fears. The dollar is under pressure for many reasons — soaring deficits, the lingering effects of the financial crisis — and some countries have called for a new reserve currency.

    So, let me get this straight. If you invest in gold because of fear of collapsing stocks, bonds, Dollar, Euro, commodities, social structure and the US Constitution you’re no different then someone who believes there’s an alien-made base on the dark side of the moon?

    The very reason individuals put their money into gold is when the financial, economic and social stability of their countries are in question. The author of this article pointed out the sudden rise of gold in the 1970’s, and its subsequent collapse, “Gold investing became a fool’s game, a land of dead money. Instead of the world unfolding as gold bugs expected, the Federal Reserve tamed inflation, the Cold War petered out and oil prices dropped into the $10-a-barrel range.

    Yes, it was a fool’s game for those who bought in at the TOP of the gold bubble at the time (kind of like buying real estate at the beginning of 2007). For uninformed investors, who are investing in gold because the rest of the herd is investing in gold, the results will usually always be the same. The herd investor buys in at the top of a bubble, and gets creamed when it pops.

    But, for those who saw trouble coming years ahead, gold was a very valuable tool in helping to preserve wealth. The rise was due in small part to rising inflation, but the real reason may very well have been because the people lost confidence in the government’s ability to mitigate the crisis. This is very similar to what we are experiencing today we’re not even close to an end to this disaster we call a recovery. As the crisis deepens and more people lose their jobs, credit contracts, retail sales decline, house prices collapse, national debt soars, taxes go higher and the American people realize that the government has thrown everything it has at the problem and it’s not working, there will be only one safe haven. The same safe haven that has existed to preserve wealth for over 5000 years.

    Make note, that when this crisis is finally over, perhaps in a couple of years, perhaps in ten, gold will have likely bubbled and popped,  and it will return to a dormant state as it did between 1982 and 1999. For the forward-looking investor, this will be yet another great opportunity to stock up while the price is cheap, because, as history has proven time and again, government will eventually become unstable again and the price of gold will rise.

    Related reading:

    A New Way to Value Gold

    URGENT ON GOLD… as in URGENT

    It Took 22 Years to Get to This Point

    Gold has been the right asset with which to save your funds in this millennium that began 23 years ago.

    Free Exclusive Report
    The inevitable Breakout – The two w’s

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      3 Comments

      1. Gary

        The article reminded me of this quotation:

        All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.

        ~Arthur Schopenhauer
        We are nowhere near Stage 3 yet.  Hold on to your hat, it’s going to be a rough ride.
        Gary

      2. admin

        Very interesting indeed. If gold is in some sort of hidden backwardation, then we should see some serious price explosions. I do wonder if it is accurate.

        Also of mention is this article from Project Mayhem over at Zero Hedge:
        Gold move not confirmed by backwardation

        http://www.zerohedge.com/article/gold-move-not-confirmed-backwardation

        Perhaps this info was not readily available when the article was written. My knowledge on how banks/buyers operate in the futures market is limited, so i have to go off third-party info to help me determine wtf is going on.

        Nonetheless, it doesn’t take a genius to know that buying gold is probably one of the best investments someone can make right now. Even at $1050, it is probably worth it, considering we are at 50% of the all time high in real USD terms.

        Since this crisis is way beyond anything we have experienced in the last 50 (perhaps 100!) years, then I suspect gold will even blow through its inflation adjusted high of around $2000. Schiff, Armstrong, et. al. suggest gold could reach $5000 at some point in the next several years. In my view this is not out of the question, especially when the S really HTF.

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