Today I will talk about the most divisive asset class of them all– gold. Even though real estate has been crushed, the general thinking still is that real estate is a good long-term investment. Bonds are still a viable investment for many people, as evidenced by falling yields. But gold? Good luck trying to convince people on that one.
The most common arguments against gold I hear are: Isn’t gold expensive? And, gold serves no purpose (the “I can’t think for myself but I’ll believe whatever Warren Buffett says” argument).
The easiest argument to shoot down is the one that claims gold is expensive. Gold has doubled since 1980 while the stock market has risen about 15X and somehow gold is the overvalued asset. Interesting. Heck gold hasn’t even kept up with the growth in the national debt, but again, somehow gold is overvalued. Doesn’t make sense to me, but that’s fine because it is nearing the time to load up again.
So now we get to the question of what purpose gold serves. I might upset some gold bugs here, but let me just say that I would even hesitate to call gold a store of value. In times of stability, gold is a horrible store of value- there’s no other way to put it. But in times of instability, and more specifically, times of fiscal irresponsibility, gold is much more than a mere store of value. It is the only asset people want to flock to, period.
Projections of $3000-$5000 gold are still laughable, and this is what keeps me bullish. The world economy is going to collapse at the seams and we will all see if gold has any utility. If the Euro experiment fails, which it will, what do you think people will do, run to the Yen? Are you kidding me? If anything the fundamentals for Japan are worse, and they are probably next to go after Europe. Then once Japan defaults do you think people are going to be confident in buying dollars? Maybe temporarily, but this won’t last long. So after all the smoke clears, which currency will be left standing? Gold.
A very simple question I need to ask for all the gold bubble experts is: Where is the parabolic move in gold? The next target in gold is at least $2000, and this will amount to merely a 20% rally. The stock market rallied 20% in a couple of months, but have you noticed almost no one (except perhaps Robert Prechter) is calling it a bubble? Be balanced and treat each asset class more or less the same. Stocks will probably double before 2020, but so will gold. What’s the big deal? This is just a manifestation of where the world is headed economically and politically.
If you’ve followed this blog for awhile, you know I love buying gold when it is unfavored. I think the consolidation pattern we have seen is going to unwind at the latest by the 2nd half of the year, and it will lead to a very crazy rally. Just stay the course, know why you are invested in gold, and when gold rallies, we will prove the naysayers wrong–again.
Expected Returns – April 16, 2012