Gold Market Rhyming

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.

Greg Canavan+
for Markets and Money Australia

From the archives…

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

The Best Way to Invest in a Volatile Market
27-06-2013 Kris Sayce

Greg Canavan

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing.

He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors.

Greg Canavan

Latest posts by Greg Canavan (see all)

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10 Comments on "Gold Market Rhyming"

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And the moral of the story is,,there is nothing as certain, as uncertainty.


Uhhh, death ‘n’ taxes, SC?


Yes BP, that too. I’m to close to one, and trying to avoid the other.


‘minimise’, SC, ‘minimise’. ‘Avoid’ance is naughtiness subject to large financial penalties… .


I thought it was ‘evasion’ the dirty deed, BP, or maybe ive got it wrong.
In any case things are a bit different here, must be the weather, today is a beautiful day, birds singing, bees buzzing around the cottage garden, all in all a good day to be happy.
Retired you see, makes a difference.

Yes, ‘retyred’ does make a difference. Complete financial independence, with flexibility and liquidity, is probably the most desirable aspect of that happy state. And when the ‘work’ one does, by choice, is on your own properties, there’s a great source of satisfaction. One might have paid a contractor to do it, with GST added to the bill, but mastering the less-technical trades has intrinsic rewards. Avoidance / evasion… probably ‘evasion’. I’ve heard our accountant call it both. He has no issues with ‘minimisation’ and nor does the tax man. I do wonder, at times, why redraws and offsets fall into… Read more »
‘Retyred’ BP, I like it. At least I am ‘fixed’ for life as regards pensions, glad I did’t let some expert manage my fund. Friend lost 30% of his in 07/08. As for investments its of the golden kind now, where the returns have been modest so far, without need to bother the taxman, admittedly, a little setback of late but, as its only a hobby and an oportunity to buy more, with a wait and see outlook. Large gardens in a mess, tend to be daunting prospects, but as the Dear One keeps telling me, slow down, theres always… Read more »
Our best friends receive double pensions (US and Oz) and supplement those with blue chip dividends, SC. They also receive medical and pharmaceutical benefits. We don’t mind being pension-excluded, but I must admit it rankles just a little paying $60 or so to fill a script, when my mate gets it free, over-the-counter! (A small blip on the radar, really! :D ) Yes, the gardens can get away from one. I’m pruning over fifty olive trees right now. Foolishly I failed to prune when they were younger… and I’m having to rope-and-lower major branches, to avoid being flattened by some… Read more »

Used to have 10 acres near Richmond in Tasmania, BP, was working then, found it too much and sold out. Went to Europe for a few months, liked it and stayed. Now have a small cottage and 1/2 acre of neglected land, trying to put it right.

Read recently that the US has a $16 trillion debt and can’t pay the interest on the credit and faces some sort of Financial Armageddon, haven’t we heared this before., whats your take on it?.

Another nice day,, ho hum.

SC: “…the US has a $16 trillion debt and can’t pay the interest on the credit and faces some sort of Financial Armageddon, haven’t we heared this before., whats your take on it?” Sorry, SC, apparently missed your comment. Too busily enjoying the warmer weather here… a real change from a dreary winter in WA. I think the US has probably bought a large dog it’s now compelled to feed. And yes, it’s likely to bite-the-hand that feeds it. I’ve a better grasp of what’s happening after reading Sylvia Nasar’s outstanding book, ‘Grand Pursuit’. Yes, she’s biased, but sometimes you… Read more »
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