The point of this blog is not to lecture about how gold is going to go straight up until the end of time. I’ve read history and studied markets: I know every asset class has its time in the sun. I try to be very balanced, which is why I have no problem making contrarian calls. I am one of the staunchest supporters of gold, but when it becomes as overbought as it was recently, I must preach caution. As I said right before the correction in gold, if you are going long on leverage into such strength, you are being very foolish.
The speculator who solely looks at lines on a chart without a sense of history and value will get crushed by this market, or any market for that matter. You must understand, crushing markets is not all about knowledge of economics, technical analysis, or quantitative analysis. If beating markets were based solely on knowledge and theory, why is it that some of the greatest economic thinkers of all-time couldn’t invest for their lives? Thomas Malthus could theorize about economics with the best of them, but he just did not have the stomach for markets. You must combine knowledge with a feel for value and an understanding of human nature. This is what David Ricardo had; this is what John Maynard Keynes had. This is what Helicopter Ben doesn’t have. I’m convinced both Ricardo and Keynes would be crushing the market right now; they would not be utterly perplexed by the move in gold like Bernanke is. Now I can theorize about what makes a speculator great, including synergies in knowledge and all that, but to me, it all adds up to a “feel” for markets and the future. If you scoff at such notions, then I suspect you aren’t making too much money in the markets.
I think you can develop a feel for markets to an extent, but I must be honest here, most people will not. Most people let their emotions get in the way. Some of the smartest people I know panic like headless chickens as soon as they lose 10% on their positions that they know are fundamentally sound. How do you explain this? The value of the given asset has just shot up relative to price. If you panic at all, you should be panicking because you cannot buy enough on weakness. I’ve only experienced 2 all-out “I need to buy” panics when it comes to gold. One came in the Fall of 2008 when gold collapsed to $700. The next “panic” came in mid- 2009 when gold was hovering at $900 for what seemed like ages. I felt a paradigm shift coming and I did not want to miss out. Luckily, I was correct in panic buying both times. Many may disagree with me, but I think there is one more “panic” buying opportunity coming.
I’ve stood and watched in total calm as a $70 meltdown has unfolded. I was mentally prepared for a correction, so I am not losing my head here. Some may be buying at current levels, which isn’t the worst play, but I personally am not. If we were nearing critical technical levels of support and downside momentum were waning, I would be a buyer. As it stands, I am patiently observing this correction with cash on the sidelines handy. This is a long-term secular bull market. On the charts, this correction will ultimately look like a fly on an elephant’s behind just like every correction to this point has.
I see a couple of potential scenarios unfolding. Scenario 1 is a minor correction to about $1250, with a subsequent moonshot move to around $1600. The next scenario is a 6-12 month correction similar to the correction we saw last December. From peak to trough, gold dropped about 15%. So I’d say a reasonable correction based on the recent peak is to $1100-$1150. I would be backing up the truck at these price levels.
So what stands out as the best plan of action? Buying on weakness.
Gold is a global asset that acts as a referendum on global confidence. Now take a look at what’s happening globally. The French are protesting and rioting in response to pension reform. Now this is where a “feel” for events comes in handy. Let me ask you: What distinguishes France from the U.S.? Do you really believe pensions will not be reformed in the U.S.? Do you think Baby Boomers who just lost 40% of their net worth will be happy when pensions are restructured? And let’s not forget that the composition of pensions is downright terrifying. Are Americans really relying on U.S. government bonds and mortgage backed securities, which continue to be rated in dubious fashion, for their retirement?
The U.S. has delved into the socialist model in the same way that France has. You promise people the world, and soon enough, they become entitled. Retiring at 60 in France instead of 62 has become a “right.” Over 50% of Americans are net receivers of benefits from the government. Let’s face it, entitlements have become a “right” for Americans. Sorry to ruin the party, but you have the right to life, liberty, and the pursuit of happiness, not handouts from the government. Drill it into your head: We are bankrupt and our futures have been seriously compromised.
Objectively speaking, Socialism has never worked in history, period. Of course people love to envision a utopia of sorts and rail against the capitalistic machine. The Socialist model has been pondered since ancient times- it’s nothing new. People think that we can manipulate distribution without affecting production. But empirical analysis proves we cannot. Failed experiments of the likes of Robert Owen prove we cannot. The failed Marxist experiments prove we cannot. Why humans never learn is beyond me.
If you can’t see the Socialist trend in America, then quite frankly, there are holes in your knowledge, not mine. The Socialist model always collapses under its own weight as entitlements become bloated and tax rates become confiscatory. The trends of the future are very clear. People can stand only so much. You can bail out failed corporations at taxpayer expense and people will watch as these very banks hand out record bonuses. You can ram a Health Care Bill down people’s throats. But when you mess with people’s entitlements, watch out. A reneging of government promises = a collapse of public confidence. Don’t be surprised if the protests in France find their way to the U.S. Don’t be surprised if gold soars in response. You see, I am no blind gold bug cheerleading every rise higher because of “inflation.” I see the big trends and analyze them against the backdrop of history. I believe major change is coming. Like I’ve said before, it is just time.
