You know the old saying, history never repeats, but it rhymes? Well, we’ve got a bit of rhyming going on in the markets these days. Firstly, let’s look at the following article on gold 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 the article was from 1976, written just a few days after gold completed its mid-1970s correction from nearly US$200 to US$100 an ounce.
The similarities with today’s mainstream commentary on gold 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 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.
While gold remains well and truly out of favour, the craziness on Wall Street continues unabated. Yesterday, the infamous Winklevoss twins filed documents with the SEC to establish the Winklevoss Bitcoin Trust, an ETF 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 (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.
for Markets and Money Australia
From the archives…
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The Best Way to Invest in a Volatile Market
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