Why Is Gold Different?
"This time it's different." Four words that should instill dread in even the most bullish investor.
To be fair, most of the commentaries in the financial press usually use the line with heavy irony. They know only too well that this mantra of dot com boosters came back to haunt them at the end of the last century when the stock market, particularly the tech-heavy NASDAQ, grew to mind-numbing heights then did a quick 180 degree turn and headed spectacularly back to earth.
Over the last couple of weeks it seems the rout has re-started after stock market indices underwent what looks like a classic bear market bounce (gains on the charts look like they hit some nice Fibonacci support/resistence points of 50% - 60%).
So everyone is thinking is anything safe?
Just weeks ago "the man on the street" was advocating buying gold.
You probably know the arguments for gold and there are some good reasons: interest rates are going to be at record lows for the forseeable future in Canada and most of the developed world.
House prices are in the stratosphere.
There is a gargantuan build-up of public debt due to the bank bail-outs (less so in Canada although we have not been immune to these recessionary times) and growing private debt. The fear is that countries will continue to debase their currencies to alleviate their debt load.
The inflation "genie" appears to be out of the bottle and as we know genies are hard to get back into bottles.
Gold has historically been a good long-term store of wealth. It acts like a currency.
The big question however is what will gold do if deflation not inflation hits. If stocks drop like a stone, I'm inclined to think that gold would go with it. Gold has been rising for several years now.
Some have commented on its frothiness. Billionaire currency trader George Soros said recently at Davos that gold was the "ultimate bubble".
If the 2008 market sell-off is anything to go by, gold will not be immune, in a market collapse. Gold isn't different. It flows back and forth everyday via gold Exchange Traded Funds. If investors need capital they will sell gold. If people think gold's overvalued they will flee.
The goldbug newsletters still keep the faith in gold. A contrarian signal, perhaps?
For those who bought gold this year, it may end up being the very opposite of what it is being touted as being: a store of value and a source of peace of mind.