Is Gold Washed Up?

The Financial Times states:

“$6.3 trillion wiped off markets in 2011.”

The FT cites a Bloomberg calculation that tells us the global stock markets lost a little more than 12%, dropping to total capitalization of $45 trillion.

While stocks lost 12%, gold rose about 10%. For the 11th year in a row (we’ve lost track) our “sell stocks/buy gold” formula paid off. Between falling stocks and rising gold there’s a spread of 22%. Not bad.

Dear Readers deserve full disclosure. Towards that end, we didn’t make money on both sides of the trade in every single year. Gold went up every year. But stocks didn’t go down every year. Stocks haven’t had a losing year since 2008. That means they were going up…alongside gold…for 2009 and 2010. And it means that selling stocks wasn’t such a hot idea those years. You could have made more money by buying stocks and buying gold.

Still, if you had followed our approach you would have made solid money every year – even when other investors were getting killed. Let’s hope our good luck continues!

But today, we’re writing not about the known knowns of the past but about the unknown knowns of the future. We don’t know where prices are headed in 2012 – and we know it!

Still, we don’t mind taking a guess. And let’s begin with our favourite investment – gold. Apparently, the smart money thinks gold’s run is over. Here’s Bloomberg with the story:

George Soros, the billionaire who two years ago called [gold] the “ultimate asset bubble,” cut 99 percent of his holdings in the first quarter, Securities and Exchange Commission data show. Hedge fund managers John Paulson, Paul Touradji and Eric Mindich also sold bullion this year. While speculators in New York futures are the least bullish in 31 months, the median estimate in a Bloomberg survey of 44 traders and analysts is for prices to rally as much as 39 percent to $2,140 an ounce in 2012.

The divergence of views is widening after prices declined 19 percent from a record close of $1,900.23 on Sept. 5, or 1 percentage point away from a bear market. As some investors retreated to cash amid a $10 trillion slump in global equity values since May, others bought more metal, taking holdings in exchange-traded products to an all- time high two weeks ago. Bullion’s 8.1 percent gain in 2011 means it’s on track to beat stocks, bonds and the dollar for a second straight year.

“It’s done its job this year of protecting investors,” said Michael Cuggino, 48, who helps manage about $15 billion of assets, including $3 billion in gold, at Permanent Portfolio Funds in San Francisco and correctly predicted in February that prices would keep rising. “Gold has been all over the place. If you bought gold at $1,800 then you aren’t too happy. Some people will get out of gold, but the longer-term investors will remain.”

Dennis Gartman, the economist and author of the Suffolk, Virginia- based Gartman Letter, said Dec. 13 that traders were witnessing the “death of a bull.” He sold the last of his gold the previous day and said Dec. 23 his outlook was neutral. The “megatrend” in bullion is “in all likelihood near the end of the road,” Markus Mezger, co- founder of Zug, Switzerland-based Tiberius Asset Management AG, which manages about $2.5 billion of assets, said in its 2012 outlook report on Dec. 23.

Well, what about it? The smart money thinks gold is washed up. It thinks the bull market in gold is over. The smart money is selling. It’s moving on.

But what about the rest of us? What about those of us who cherish good looks more than brains…virtue more than money…a good drink over a good deed? What do we think?

We don’t remember our bad guesses. But we remember our good ones. And you may recall too that when gold got to $1,900 we thought it had gotten ahead of itself. After all, we’re still in a Great Correction. And as near as we can tell, the correction is intensifying. Prices don’t go up in a correction; they go down. Investors don’t fear inflation; it’s the lack of it that makes them sweat.

Besides, it looked to us like gold was over-priced.

In the 1940s, gold sold for $35 an ounce. A new Buick cost about $750. Without putting too fine a point on it, you could get your new wheels for about 20 ounces of gold.

Today, a new Buick will set you back about $26,000. Divide by $1,550. What do you get? About 16. This tells us that an ounce of gold is worth more today than it was then.

How about oil? In 1940 you could get a gallon of gasoline for about 10 cents. Last week, it was $3.50. An ounce of gold would have bought you 350 gallons in 1940 and 414 gallons today.

Conclusion: gold is not too cheap at $1,500. At $1,900 it was too expensive.

So we warned that gold would go down too. Since then, it’s lost almost 20% of its value.

But we’re looking ahead. And ahead what we see is more of the same…more or less. Gold will eventually shock everyone by rising far above $1,900. When the real crisis hits…the crisis coming in the US bond market…gold will be the money that nobody doesn’t want.

But what we learned in 2011 was that when a Great Correction pinches, the dollar is the salve of choice – not gold. When investors fear losses, they turn to the dollar for protection.

Eventually, when they begin to fear inflation, the gold bugs’ day of glory will be at hand.

In the meantime, we’ll probably see a further correction in the gold price…perhaps down to $1,200. Or, perhaps it will stop at $1,400. We don’t know. And it doesn’t matter. Buy gold on dips; sell stocks on rallies.

This strategy may or may not pay off in 2012; but gold is insurance against financial disaster. And one is coming…


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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1 Comment on "Is Gold Washed Up?"

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Rodney Simeon

The price of gold is going to steadily rise as more and more people start to by gold and other precious metals in preparation of the inevertble economic collaps. Cheers Rod.

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