The Gold Frenzy?

The longer I invest, the more I understand that there is a certain temperament you need to be profitable. This is not a pure data-driven field- otherwise investment banks with their fancy tools and teams of analysts could actually predict events instead of being overrun by them. You need to feel out markets. You need to understand history. You need to be objective. And you need to be willing to stand by your convictions, especially when you hold an unpopular view.

Once upon a time, gold was a very unpopular trade because it went down year after year. Now it is an unpopular trade because it has gone up year after year. It seems that no matter what gold does, there will be a healthy dose of skepticism from the mainstream. Believe it or not, I am comforted by the fact that there are so many people who believe gold is in a bubble. Having people on the other side actually helps you clarify your thoughts. It is very important to know how many people think differently from you and why.

Fighting the Crowd

In everyday life, social proof, or modeling your behavior on the behavior of others, is a shortcut to good decision-making. In investing, social proof often gets you killed.  But just because I tell you not to be swayed by social proof, doesn’t mean it won’t happen.  Social proof is the engine of exuberance-driven booms and panic-driven busts. It is an irrational boom in gold and silver that I’m sure has many readers of this blog concerned; a frenzy in gold will be my signal to get out.

I have heard throughout the bull market in gold that it is a bubble. People who have no experience living through the 1980 bubble top in gold are making these claims because MC Hammer was in a gold-related commercial. How interesting. Anyway, I take a different approach. I have spoken to gold dealers who are telling me that buying activity in gold has not risen in this latest rally. They are also telling me that the current level of public participation in gold is nothing compared to the frenzy in 1980. How is there a gold bubble if the public isn’t buying? As always, it is a matter of perception.

The interesting thing about gold is that it will become more popular at $2000 than it was at $500. The economic backdrop when gold is trading at $2000 should be pretty interesting. I’m guessing there will be debt defaults, higher inflation, and some form of civil unrest. At the top, it will be incredibly hard to sell. We are not there yet. The investors in gold up to this point have been strong hands and dip buyers. Gold will reach new heights when the public gets involved.

The Gold Frenzy? is a post from: Expected Returns

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