On Demand

A Follow Up To My Opinion About Gold

by

I have found that a good sense of humor is a helpful thing to have in life. I mean, who doesn't like to laugh? So, when I give someone the gift of laughter, it not only makes me feel good, but it makes me feel I have made the world a better place in my own small way. The reader's comment below makes me feel as if I am doing my part.

Your uninformed and naive opinion on gold is comical!

Last week, I devoted two paragraphs to gold. Apparently, the reader did not agree with my opinion about gold. To refresh, my first paragraph long-windedly asked the question - why is gold going for $1600 or so per ounce? My second paragraph, though, is the one I suspect my reader found comical. In that paragraph, I said,

... gold is a bubble that cannot hold. Perception and misunderstanding inflate the bubble and as soon as investors perceive the problems of the world are resolving and as soon as the global economy shows sustained signs of recovery, the price of gold will retreat to its normal levels, which is far below $1600-$1700 per ounce.

Speculation and fear do form the base of gold's current value. True, folks numbering in scores of millions buy gold each year to celebrate festivals in Southeast Asia and India. It is also true that governments around the world buy gold to back their monetary systems, and in recent years, India and other countries have been building their inventories. As well, untold millions buy small doses of gold in the form of jewelry, but the fact remains the price of gold currently sits where it sits because "uninformed" investors are afraid and "informed" investors are speculating. This scenario, my friends, makes for a bubble.

Consider gold's price in the last five years. The price began rising rather quickly as the market panicked in late 2008 and early 2009 (fear), and that price rise continued in the midst of all the negativity right through last year when pundits were pushing gold up (speculation and fear). Is it that easy to forget the doom and gloom pundits and analysts predicting gold would hit $5,000 per ounce, and when that looked ridiculous, they came all the way down to $2,000? Folks, I agree my view is a simple way to look at gold, but more often than not, Occam's Razor is correct - the simplest explanation is the one that works.

As to the issue of gold as an inflation hedge ... Once again, since the first Fed QE program, the doom and gloom pundits and analysts have been telling us that rampant inflation is coming. It has yet to appear, and it might, but for now, it is the fear of the Fed's monetary intervention that is driving the speculation in gold. So what gives? No inflation and gold is still high ...

I know an industry has been built on making the stock market seem complicated, but in the end, it all comes down to reality - markets are subject to fear and greed, and in today's world, there is more than enough of these two elements around.

Heck, it is not as if folks could use it if the apocalypse came because most owners of gold only own the metal virtually, on paper or digitally.

I will give the reader the sentence above. The phrase "most owners of gold" is far too general and it lacks clarity. After all, tons and tons of the pretty stuff sits in heavily guarded gold depositories around the world, innumerable boxes hold hoards of old gold coins, and an untold amount hangs around necks, rings fingers, and dangles from ear lobes. Yes, I should have said, "most investors in gold." That would have been more accurate. Other than that, my position still stands - as fear recedes, so will the price of gold. It always has and there is no reason to suspect it will not this time as well.

I do thank the reader for taking the time to write me, even though we disagree. As well, it makes my day knowing I brought a little laughter into his life. Honestly, we should all endeavor to do that more often. The world will be a better place for any effort we make in this regard.

Trade in the day; Invest in your life ...

Trader Ed

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About the Author

Hello, I am Trader Ed.  No, not Mister Ed, although at times I feel a bit like a talking horse.  You see, my job is to educate folks about the market, which means talking about (or writing in this case) anything and everything that affects the market.  This means the world is my oyster.  Every day, I read for about an hour or so about the happenings in the world.  Every day, I look for leading indicators that will help me “see the future.”  No, I am not an oracle, nor do I pretend to be, but I do look for macro trends that point in a direction, and I am more than happy to share my “vision” with you.  Keep in mind, though, my vision derives from analyzing the fundamentals of the global economy, as well as looking at current movement in the market.  I shun the doomsayers and I embrace the realists.  I look to the positive without denying the negative.  In short, I paint as realistic a picture of the market as I can.  So, if you have a question in this realm, feel free to ask me.  I will answer you in this column and I will do that to the best of my ability.

Hoping to hear from you.

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