Great Depression Online Archive Issue:

Why Gold Has a LONG Way to Go

Great Depression Online
Long Beach, CA
November 06, 2009

Inside This Issue You Will Discover…

*** Gold Sets New High
*** Is There a Gold Bubble?
*** Why Gold Has a LONG Way to Go
*** And More

Gold Sets New High

Gold, as we’ve said many times before, is the ultimate asset of last resort.  No government controls its supply.  It can’t be printed or created out of thin air.  There’s no IOU attached to the back of it.  It’s entirely sovereign. 

This Tuesday, the Federal Reserve Bank of India, revealed it had bought 200 metric tons of gold from the International Monetary last month.  Obviously, India doesn’t hold the world’s paper currencies in high regard.

An example of why took place on Wednesday, when the U.S. Federal Reserve announced it would keep the federal funds rate at an all time low…between zero to 0.25 percent for “an extended period.”  The same day, by no coincidence, the price of gold climbed to an all-time high of $1,098 an ounce.

Is There a Gold Bubble?

Remember that gold, like cigarettes or sea shells, is only worth what people believe it is worth. Right now, people believe it is worth nearly $1,100 per ounce.  Ten years ago they believed it was worth $300 per ounce.

We here at the GDO believe you must buy low and sell high to make money from an investment.  Therefore we liked gold a lot better at $300 per ounce, or even $500 per ounce, than we do at $1,100 per ounce.

With the price of gold at a record high, we must ask the question: Is there a gold bubble?

Earlier this week ‘Dr. Doom’ Nouriel Roubini claimed that gold was indeed a bubble.  Shortly after legendary speculator Jim Rogers slammed Roubini, saying gold’s not a bubble and that “Mr. Roubini hasn’t done his homework, yet again.”

So who’s right?  How can we know?

To answer these questions, we bring you a guest essay from Jeff Clark of Casey’s Gold & Resource Report. 

Enjoy,

M.N. Gordon
Great Depression Online

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Why Gold Has a LONG Way to Go
By Jeff Clark, Casey’s Gold & Resource Report

A couple weeks ago, I had my TV tuned to a business show that loves to give predictions on the markets and the economy.  On that day, one of the program’s regular guests declared it was time to “short” gold, that it had reached its top, and that the precious metals bull market was over.  I’ll try to be nice in my rebuttal.

So, what was his reasoning: technical analysis of wave counts?  Falling demand?  A telling ratio?  Sun spots?  No, he noted that upscale department store Harrods in London began selling gold bullion and coins “over the counter,” ergo, the top was in.  Nice try, “Bert,” but this is amateurish.  You really shouldn’t be playing with the big boys if that’s the basis of your call.

Yes, gold will someday put in a top, and since the gold price is largely determined by psychology, the end of the bull run will be marked by behavioral types of signals.  But calling a top in gold now is like declaring that WWII was over because the Allies won a small skirmish in early 1942.  To have made such a statement, based on a small, isolated event, ignored the greater forces that had yet to play out and would have made any journalist or military strategist look foolish indeed.

And here’s why Bert looks equally silly today…

If the top were in, we’d be in the midst of an all-out Mania. Are we?  Do you get the impression there’s a rush into gold by the greater public right now?  Are headlines blazing the covers of major magazines pronouncing gold as the new investment king?  Has Wall Street gone gaga over gold and silver?  I ask because these are the true signs that a trend has entered its final blow-off top and would signal it’s time to get out.

I decided to put Bert’s prognostication to the test, and I invite you to play along.

First, I struck up casual conversations with my friends, neighbors, relatives, acquaintances, my wife’s co-workers – heck, even my seatmates on airplanes – angling to learn how much gold they were hoarding, about the killing they were making in gold stocks, and how they were getting rich from all their precious metal investments.  (In fairness, I had to exclude my dad, who is an award-winning gold panner, but he’s the only one.)

I found no one – not one person – who is actively investing in anything gold or silver, let alone rushing to buy or hoard the stuff.  I had two people who confided that they did own gold, but in both cases it was inherited.  A few were curious how they would go about doing such a thing, and fewer asked if I thought they should.  Most everyone looked at me blankly when I asked; they didn’t seem to know what I was talking about.  When I got a reaction like that, it was pointless to ask about gold stocks.  Of the handful I did ask, most had never heard of Barrick Gold, the world’s largest gold producer.

Now ask yourself the same thing: how many of your family, friends, neighbors, and co-workers are buying gold and silver coins?  Are any of them giving you hot stock tips about a fantastic gold producer, or telling you about the latest gold discovery made by a company in China?  Have any fellow investors told you they’re dumping their brokers because they can select gold stocks better on their own?  Anyone telling you they’re going to night school to learn the gold mining business?

Next, I surveyed a large sampling of print media looking for some of these signals that Bert surely had spotted.  Over the past couple weeks, not one of the major business magazines I reviewed had anything on the cover about gold or silver.  Further, there were no articles on precious metals, such as the best ways to buy or store all this gold everyone is buying.

One magazine ran an article about ways to prepare for inflation, and gold wasn’t even mentioned!  I did see an ad from the U.S. Mint in another, along with a couple small ads in the back that said they had the best prices on bullion (right beside the teasers for buying a Russian wife), but that was it. Even the portfolio allocation models recommended in the articles I read made no specific mention of precious metals (one recommended a “resource” fund, but their discussion of it was centered around energy investments).

Other than the articles you seek out, how many mainstream magazines do you see extolling the virtues of gold and silver on their cover?  How many bestsellers are prominently displayed at your nearest bookstore that scream at you to buy gold stocks?  Are you getting fed up with all the junk mail you get about gold and silver?

Last, I went out of my way to look for stories on gold and silver on TV and radio.  About all I could find were the same ads that popped up after last year’s Super Bowl commercial by Cash4Gold.  A couple programs quote metals prices, and I was able to find another that actually used the word “gold” in a sentence.  It might just be me, Bert, but I can’t find any news anchors talking about the latest gold discovery or that “must own” gold stock.  No in-depth special reports from investigative journalists on the hot Canadian junior mining sector.  Nothing on my radio about the best ways to store all the silver every smart investor has been buying.

How about you – are you feeling bombarded by TV and radio ads and segments on precious metals?  Do you have the clear impression gold and silver are the hot new investing trend around the world?  Are you Tivo-ing certain TV shows because of all the great info they provide about picking the next great gold stock?

If we were in a Mania, Bert, all of this would be happening.  But it’s not.  Those who buy gold coins in the U.S. are still largely viewed as members of a fringe group.  There is no public discussion on gold, no insider tips on the latest hot gold stock, no special reports on how to store all the bullion you’ve collected.  The psychology isn’t on our side yet.  One signal does not a Mania make.

Last and perhaps most important, Bert, are you sure the dollar is done falling?  You’re absolutely convinced we won’t see price inflation?  Our current debt load won’t pose any future problems?  No more worries about foreigners buying all that debt?  Obama and Bernanke really have saved the day? 

Bert, send me your shorted gold positions, I’ll buy them from you.  And although the gold price could see a correction in the near term, and several more along its journey to “the top,” remember that battle in early1942 and all that had yet to occur before the war was over.

And one more thing: when you finally become breathless to buy gold stocks, I just might be ready to sell them to you.

Sincerely,

Jeff Clark, Editor
Casey’s Gold & Resource Report

P.S.  Are you convinced you have the right gold and silver investments for what lies ahead?  For just $39/year, you can be sure you have the best gold and silver stocks, along with specific recommendations on the best places to buy bullion. Check out Casey’s Gold & Resource Report.

 

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