Ridiculing gold bugs while resentfully acknowledging gold's strength

I Don't Like the Big Shiny Crowd Around Gold

By John Dizard
Financial Times, London
Tuesday, February 3, 2009

http://www.ft.com/cms/s/0/45f0574a-f193-11dd-8790-0000779fd2ac.html?ncli...

Gold, the Bond villain of asset classes, enjoys tormenting those in its thrall. These days, that group includes a large and growing part of what's left of the world's private investors. The institutional investing world is still hesitant, perhaps because, though the managers are tempted, they have got every change of course wrong in recent years.

So the Indian brides who used to keep up the demand side have been pushed aside by paranoid Middle Americans willing to pay $20 or $30 an ounce premiums for ordinary Krugerrand coins. Even now, months after the Lehman bankruptcy, with trillions of government money supporting the banking system, there are a lot of members of the public who seem to think they better start hoarding if they want to buy bread in the coming months.

I was lucky, though I prefer the illusion that I was smart, to get my call for the direction of the gold market right in an article I wrote for the Financial Times just a year ago. I thought that the metal would make a new high, then correct, though with a shallower and briefer decline than other risk assets. The most likely trigger for a new bull market, I thought, was a European-based credit crisis that created widespread doubts about the future of the euro.

That's what happened. So now I think I'll surrender some more hostages to fortune, and say that while I believe we are still in a long-term, powerful bull market in gold, we are likely to have another painful correction before an even more dramatic rise gets going by the summer of this year.

Why? Because gold has a way of inspiring rallies that raise hope in the new members of the faith, only to crush that faith with cruel declines. Yes, that is over-written, anthropomorphising nonsense, but that's the kind of prose, and emotion, that gold inspires. After all, it's just a heavy, ductile metal with some useful physical properties. Gold isn't anyone's "friend." In real life, it just sits there.

Thanks to some cellular-level quirk of human nature, though, even the most logical people attribute some animate nature to its price moves. Really, those just chart our social psychology. That is predictably bipolar, which means that the present gold fever expressed in television commercials and internet chatter will reverse temporarily.

I don't like crowds, and the one around gold is just too big at the moment. Let's say Western civilisation is coming to a bloody end. That won't happen for a few months at least -- I don't think that's going too far, do you? So why not wait until you don't have to pay an unjustifiable premium for something as common as a Krugerrand? Within the next couple of months, there'll be at least a bear market rally in equities, drawing in some of the small investors who would otherwise buy those coins.

Gold refiners and mints will have converted more of the relatively undesirable 400-ounce good-delivery bars into 1-ounce coins and 10-tola squares. Then you can turn your survivalist compulsion to buying gold. In the meantime, perhaps you can practise tying snares for small animals, and buying up the antibiotics at your local chemist. Oh, and get some more ammunition for the Kalashnikov. That's the first thing they'll try to control when they take over. You know who I mean.

Having said all this, I agree with the gold buyers that we are in a multi-year gold bull market that will eventually take the price to an integer multiple of where it is now. Not a big integer multiple. But enough to approximate how much inflation must shrink the real burden of debt to what the developed-country taxpayer and consumer can afford. That is, after that burden has already been reduced by default, or paid down through austerity.

You might choose, wisely, not to listen to people trying to time every intra-year turning point in the gold market. If so, you could do worse than to set aside, at regular intervals, a fixed, single-digit percentage of your savings to put into gold, or some related instrument.

That's because gold is one of, if not the most, treacherous trading markets there is. Ian Shapolsky, a New York investor who trades for his own account, and whose tactical gold trading strategy I described in this space a couple of years ago, has abandoned the metal after a reasonably successful run.

As he says: "The [gold] market is thinner than it was, and it seems that the bigger players can push it around more than they could in the past. The larger traders are aware of the chart points [price targets followed by the investing public], and there seems to be a lot of effort to push prices above 'breakout points' or moving averages."

So stay out of the deep end. Average in. Don't buy in a panic.

The key signal for the present buying frenzy came from Europe. Since the beginning of the winter the perception of the euro in the eyes of skittish investors has changed from safe haven to mousetrap.

They've become too scared. Wait for a better entry point in the next few months.

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