Lust for Lustre

ANNALS OF IRRATIONAL EXUBERANCE
Gold Bugs Bug Out
Investors in love with shiny stuff are forever blowing bubbles

Alex Roslin
Wednesday, March 26, 2008
Business Observer
The Montreal Gazette
[original story]

It's a great time to be a gold bug. With gold punching above $1,000 U.S. an ounce for the first time ever this month, small-time investors are pouring into gold.

And despite bullion's lofty prices, gold bulls say this is just the beginning as concerns about the subprime apocalypse drive investors to safe-haven assets.

Frank Holmes, CEO of U.S. Global Investors, predicted recently gold would soon top $2,000. Even wilder forecasts surround silver, which briefly peaked above $20 an ounce earlier in March. One gold-market website cited some analysts who insisted silver would explode to $135 to $200.

It reminds me of the last days of the dot-com craze in the late 1990s when the talking heads on the financial news extolled the virtues of ridiculously overpriced Internet companies that would soon prove to be worthless.

Remember the book DOW 36,000, which predicted the Dow Jones Industrial Average would soon triple in value?

That was in Oct. 1999 when the Dow was at 10,000. Alas, it peaked at 11,900 just three months later, then did a swan dive to below 7,500.

Now I'm not suggesting gold is as worthless as a dot-com shell company. Historically, an ounce of gold has always tended to be worth about the price of a men's suit. So you can be reasonably sure it will at least put some clothes on your back.

On the flip side, gold is probably subject to more speculative craziness than nearly any other market. This is after all the metal that helped inspire the Spaniards to settle the Americas and spawned sundry gold rushes.

For some reason - maybe because it's so shiny - gold drives lots of folks to wacky extremes. Gold bugs got their name from a movement in favour of the gold monetary standard in the 1890s, whose supporters wore lapel pins of small insects.

For many gold bugs, holding bullion is actually as much a political decision as one about investing. They don't believe in paper money, central banks or have much fondness for liberal ideas like the welfare state.

I see them as the market version of those backwoods survivalists who like to stock up on canned goods and ammo.

The most hardcore gold bugs have been proselytizing for bullion for a long time. Some have actually been waiting for the current gold ramp-up for the past 28 years, ever since 1980 when gold spiked to nearly $900 before it crashed and spent the next two decades ambling around between $250 and $500.

I recently had the pleasure of getting acquainted with some of these folks through a market blog I write. When I reported that my trading system had given a sell signal for silver, I got about 150 livid emails and blog comments-10 times the usual number for anything I'd else written.

"Dear Dufus," one started. "Gold and silver are buys not sells. ... Please get it right to save what is left of your reputation as a financial commentator."

"DUMP SILVER?!?!? Are you nuts?" another wrote. "You have to be crazy my man-get a clue about what's going on! SERIOUSLY-GET A CLUE !

One said, "Good luck with your future. I just bought more gold at $1,000.00/oz and may think about selling it at $1,650.00/oz."

What's supremely sad is to hear of small-time investors loading up on gold just as it again made record highs. I wonder how many were aware that gold and silver are some of the most volatile markets on the planet.

Here's what happened in May 2006: gold had nearly tripled in price to $730 from its 2001 low around $255. Like now, there was lots of talk it would inevitably rise far higher, perhaps to $3,000 or more.

Then, in the space of a month, gold crashed 26 per cent to $540. After that, it stubbornly seesawed up and down for over a year.

Now how do you think a typical investor reacted? Clearly, a good many sold at or near $540. We know that because this is the price where gold stabilized, signaling an end to the initial corrective selling pressure.

Many others would have held on for several months, but finally threw in the towel and took their loss in order to put money to work in the stock market as it took off in late 2006 and early 2007.

And that's when the major selling pressure in gold would have ended, allowing its price to finally break out of its long trading range last summer and unleashing the current ramp-up.

In other words, the latecomer little guys likely didn't participate in most of the recent rise.

Fast forward to today. After gold hit an intraday high of $1,033 on March 17, it crashed 12 per cent in three days. Sure, gold could double in price to $2,000. The question is, can you afford to wait another 28 years before that happens?

Alex Roslin is a journalist and active trader. His market blog is at COTsTimer.Blogspot.com.

[TAGS: gold bugs, gold investing, bullion, precious metals, market bubbles, silver]