Are We Approaching a Second Coming for Gold?

Dow down -42 points. Gold down $12 an ounce.

Nothing special.

But gold must be getting close to a bottom. No one has anything nice to say about it.

The pundits and prognosticators are more pessimistic than in any time in recorded history. Gold miners are getting wiped out. Gold speculators are so gloomy their wives are hiding the carving knives and locking up the shotguns. From Business Insider:

If you thought things have been ugly for gold, then you haven’t paid attention to the gold miners, which have just been decimated.

As the price of gold declines further, gold will fall below the cost of production for these companies, resulting in years of negative cash flow.

Gold has declined by 37% from its highs in 2011. Therefore, we believe the myth that gold is a low risk “store of value” has been exposed for what it is to the latest generation of investors. Now, we fear that as understandably dissatisfied investors exit the market, selling could beget selling and send the gold price well below the cost of production.

In our opinion, this risk is not discounted in gold equities valuations. In our opinion, an asset that declines by 37% in value doesn’t qualify as a “safe haven” or “store of value.” And it never should have. Gold is a commodity whose price can rise or fall.

In conclusion, while we’d like to believe the carnage in the group is over, we don’t. With short reserve lives, rising costs, rising political risks and a stagnant commodity price, we believe an argument could be made that gold equities should trade at valuation discounts to other resource equities. Instead, they continue to garner valuation premiums. In our opinion, that continues to make the risk/reward for the North American gold group unattractive. At a minimum, we remain confident there are better values within global metals and mining.


Another Great Gold Buying Opportunity?


Surely, we must be getting close to a Second Coming — another great opportunity in gold.

So, we will not hold back. Why should we? You pay nothing for this service. It is free. It contains our thoughts — worth every penny that you pay for them.

We begin by reminding you that we don’t know any more than anyone else. Maybe even less!

Still, we’ve been watching the gold market for the last 30 years…and we’ve spent a long time cogitating on the weaknesses of the human mind and other organs. We’ve come to some conclusions, which we happily share with you.

First, gold has been the ultimate money for a long, long time. It plays an important role. When other forms of wealth are called into question, people turn to gold.

Since it is likely that other forms of wealth — particularly US bonds and US dollars — will be called into question at some time in the future it is unlikely that gold will become worthless.

Second, central bankers are human. And humans are prone to error and prey to temptation. The record of history is clear. When central bankers try to solve their problems by printing money, the habit is hard to break.

Ultimately, their pieces of paper lose value. And if they lose value, they must lose value against something. Typically, they lose value against everything, especially against gold.

Third, markets are never stable. Prices are never lasting. Instead, markets discover what things are worth as conditions change.

Typically, prices bounce around in an unpredictable, unintelligible way. But over the long term, prices tend to go up and down in large, long swings.

Investors become fearful…then they become brave. It takes years for these attitudes to establish themselves…then dissipate. Trends last many years, culminating in extreme situations which are lifetime opportunities for smart investors.

Fourth, at the extremes, investors tend to get overexcited. They see a bull market. They want to get in. Buying (or selling) by these “mom and pop” speculators sends prices off the charts…bringing about the final blow-off in the market. But these moms and pops are always late to the party.

When they come in, it is time for serious investors to exit.

Fifth, there are no moms or pops left in the gold market. Even serious, knowledgeable investors have gotten out. From what we read, it seems more like a bottom than a top. The public is not interested. And the professionals hate gold.

Sixth, if we were speculating — and we are not — we would bet that gold is a better buy than a sell. The price could go anywhere. But unlike the Fed’s paper, gold won’t go away. And, at $1,100 an ounce, gold is likely to be one of those few investments you don’t mind telling your children and grandchildren about.

If you buy, wait five years. Then let us know how it worked out.


Bill Bonner
For Markets and Money


Join Markets and Money on Google+
From the archives…

Gold Market Rhyming

The Great Empty Buildings of China
02-07-2013 Greg Canavan

The Tentacles of the US economy
01-07-2013 Greg Canavan

Bernanke Fumbles, the Market Tumbles, Markets and Money Grumbles
29-06-2013 Nick Hubble

How The Power of Tweets Saved Tesla Motors
28-06-2013 Sam Volkering

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money