The Death of Gold?

Contrarian investors will have some acquaintance with the concept of the “shoeshine boy” effect. This is the theory that a buy or sell is signaled for an asset class based on extreme sentiment for or against it in the media or society in general.

The term is taken from an alleged story of how John F. Kennedy’s father sold his stocks prior to the 1929 crash because his shoeshine boy was giving him stock tips over his shoes. Kennedy correctly deduced that this was a sign of an extremely overbought market and took it as a sell signal.

On the flip side of the coin, there is also the famous “Death of Equities” cover from Business Week published in August 13th 1979. The analysis that high inflation was a dampener to stock growth may have been correct but inflation was not far off in peaking and stocks were about to begin their great 21 year bull market.

A graph of the S&P500 for that time period shows a line where the famous cover was published and we see how this turned out to be a good buy signal for equities as it plainly exemplified the extreme bearish sentiment that the public had for stocks at that time.

Which brings us to the front page of the London Times that greeted my eyes on the 14^th March. Gold hits $1000 and finally makes it to the front page of the major media. Is this gold’s equivalent of the “Death of Equities” cover?

A week or so after that cover appeared, I had my own “shoeshine boy” experience as a friend approached me and asked the question “Should I be buying gold and silver?” I asked why and he cited the fear of bank failures. Before this point, he had never expressed an interest in the subject at all to me.

Perhaps you have had similar experiences but one wonders if such personal and media events are signaling a major top in the gold market. As it turns out, gold hit a high of some note the next trading day on the 17^th March and has laboured ever since. Can our Times “shoeshine boy” headline be that accurate? In other words “gold soars” but it actually will not as we take a contrarian hint from its front page. Obviously only time will tell as we watch how this current correction pans out. If gold, silver and commodities in general have reached a multi year top (for which there is mounting evidence) then this Times cover can take its place in the Pantheon of contrarian investment signals.

Comments

[Tim Plaehn:]

Excellent analysis. It will be interesting to see where precious metals go from here. Did you have gold to sell?

2008 Apr 21 09:31 AM

[Moby Waller:]

Nice article, interesting -- I am also a contrarian from a sentiment standpoint, especially for big picture moves. However, I'm not sure if the London Times headline will be the bellwether you think it will be.

I do remember in the early-1980s when Mall kiosks opened up just for the public to sell their family gold pieces, to be melted into bullion. That marked a top in the gold market. I have heard similar type anecdotes today of traveling gold-buying merchants in rural counties -- I would view a larger saturation of this type of mass buying as a contrarian sign of top in the gold market.

2008 Apr 21 09:35 AM

[stjmk:]

How many retail investors have a position in physical gold, or even gold ETFs? GLD has a market cap of about 20 Bn compared to GE with a market cap of about 300+ Bn. This does not suggest that retail investors are heavily invested.

The recent secular equity bull market/gold bear market began when Volker began to restore the credibility of the dollar through raising interest rates until everyone was screaming. We have not seen any indication that the current Fed is ready to seriously stand behind the dollar.

2008 Apr 21 09:45 AM

[Minnow:]

Your friend has the correct concern and is asking you if there is an alternative to dollars as the banks line up for bail-out money. If our financial house was in order, we could recognize his concern as a bubble and contrarian indicator. But the contrarian indicator will be when he takes out a loan on his home to buy MORE gold while his friends who sold theirs are out buying it back.

2008 Apr 21 10:22 AM

[huskerbob:]

Is anyone suggesting that oil is overvalued? Oil has been starring on magazine covers for several years now. Historically there has been a direct relationship between oil and gold prices.
Also, the cover is just stating a fact. I will be more worried when we start seeing covers reading "Gold always goes up", "Everyone is playing the gold boom!", or "Gold 30,000!". And your friend didn't say he was ready to jump into the can't miss world of precious metals - like most people on the street, he seemed to have some trepidation about buying gold and silver. He will lose interest when the financial system is no longer the source of so much scary news.
How many investors actually have even 5% of their portfolio in gold? What percentage of funds available for investment are actually in gold and gold derivatives?
Not sure that confidence will return to the markets right away as job losses mount, consumer spending dries up, and problems continue in the housing sector. Gold can't continue to skyrocket, but I doubt the price will return to its' previous lows soon.

2008 Apr 21 11:28 AM

[dieuwer:]

All these columns and replies just serve as anecdotical evidence to the one fact regarding gold: The Wall of Worry is ALIVE!
Whe I see people in streets push and pulling eachother to buy the last gold coin, THEN it is time to sell. Not a millisecond earlier.

FOLKS: remember the news items on TV regarding the madness in front of the Apple stores to buy the iPhone? Few weeks after that Apple stock topped...

2008 Apr 21 02:41 PM

[Dan Schmeidler:]

A (proven) contrarian Gold Buy signal would be: Gold is trading at an all time high of $730, then looses 25% of its value in just 30 days. These events played out from May to June 2006. I am confident that there were plenty of negative articles written on Gold after its descend from its high back in 2006. In retrospect, such negative articles were clear contrarian buy signals. Gold charts are a scary thing to look at and certainly remain a big turn-off to a lot of potential gold investors. For example, look at Gold chart 1975-1979 and compare that to 1980-1984. You'll know immediately what I am mean. Gold should therefore not be a long term investment strategy but rather a play on higher inflation expectations and weaker currencies, specifically US dollar. Our economic environment still points towards higher inflation and a weaker dollar. Buying gold now will serve as a hedge later. For example, the federal funds rate was well above 10% between 1980-1984 (even as high as 19% in 1981). Therefore, inflation expectations were extremely low, thus contributing to the collapse of Gold. Be disciplined about gold. If you have bought Gold between $900 and $1000, wait until it drops below $900, or better $850 to buy some more. Consider Gold below $750 a gift and buy some more. If, however, there are fundamental economic changes favoring a stronger dollar and lower inflation expectations, you can throw the whole Gold theory out the window.

2008 Apr 21 06:02 PM

[The Silver ...:]

Yes, I sold my speculative positions and some ounces but still retain a core position which is a long term buy and hold.

This is not the "death of gold" as I wrote in the sense that we enter another 20 year bear. No, but I am wary that this 7 year bull is long in the tooth and a correction bigger than we have seen so far will pounce.

So be cautious about your confidence. The bull isn't over in this 30 year bull market, but corrections happen, sometimes bigger than we expect.

2008 Apr 22 08:55 AM

[jo0hn2:]

excellent analysis? more like an interesting story but hardly an analysis. anyways who knows i think gold will go up steadily and be relativley stable from here on. not overly as bullish as some.

2008 Apr 22 10:00 AM

[jcrash:]

dieuwer....

"FOLKS: remember the news items on TV regarding the madness in front of the Apple stores to buy the iPhone? Few weeks after that Apple stock topped... "

Huh? The phone went on sale in June...if "a few" weeks means 30, then you are right. Otherwise, not a good analogy.

2008 Apr 22 11:47 AM

[bowman711:]

When I did my 'chart checking' it seemed to me that gold prices followed the rate of inflation more closely than any other factor. If that is right, one has to ask if the current inflation rate is increasing or likely to increase in the near future in making a decision to buy gold. With the massive flood of the U.S and world economy by the Fed and central banks around the world in the last six months, I don't see how it can mean anything other than high inflation in the near to mid-future.

2008 Apr 22 12:15 PM

[keo:]

"Gold soars as collapse frightens investors" & "Should I be buying gold and silver?” are not even close. Look for a new "death of equities" headline, combined with your friend TELLING you to buy gold & silver (not asking, but telling), and advising you to buy some hot silver/gold mines which surely can only go up...that would be the top.

2008 Apr 22 02:18 PM

[The Silver ...:]

""Look for a new "death of equities" headline, combined with your friend TELLING you to buy gold & silver (not asking, but telling), and advising you to buy some hot silver/gold mines which surely can only go up...that would be the top."

Did that even happen at the height of the 1970s bull? I doubt it.

2008 Apr 23 04:15 AM

[Nikodeus:]

Feds are printing $2 Trillion in new USD bills. Banks are hiding $1Trillion in bad credits, making forced sell-offs a certainty in the stock markets. Oil is at an all time high of $120. It takes oil and energy to produce gold. This will reflect into the prices as it has in other commodities. World gold production is giving diminishing returns. The gold will go up slowly and retain it's value nicely. Much better than any stock that is at risk of the company going bankrupt if the worst happens and bank runs and series of forced sell-offs cause a market crash.

Gold is a safe-haven at the moment in terms of retaining value and risking only a moderate pullback. Buy at dips and keep long-term, I say.

If and when oil starts to come down to around $50 per barrel, gold will too, but until then, the energy, the consumables and work it takes to produce gold, it is directly proportional to the oil price and energy used to produce it. The practical amount of work, consumables and energy used, just does not change in gold production and there is no miracle cure for producing more, unlike in perhaps food or energy. Gold is limited. Price of work is going up as food prices go up, and so have energy prices. I view gold as a long term safe-haven backup.

2008 Apr 24 12:58 AM

[maher:]

I agree with john2-- This "article" is not an "analysis", but an observation. And even at that, it is an observation based on unequal events. You cannot compare those 2 titles, they are not the same in bear and weight. Author is making a premature call on an old contrarian tale which has not even come full circle yet.

Perhaps in an effort to be sensational and appear intelligent, or make a name for himself in the print media?

2008 Apr 24 06:21 PM

[Cesato:]

Well it is unquestionable that the ratio GOLD/OIL/USD plays a role in predicting what the next move will be, however there is so much information that the reader doesn't have access to that it is everyone guess what the future will bring. Oil demand has not tripled in the last 6 years has it? The USD will be kept strong for a while because the slowing economies tasted, what the huge effect of a weak dollar is like, so unless the USA economy literally collapses to death, (it is quite ill by the way) the decoupling theory has been put to rest. Intervention? that's fine it is Central Banks work to seek stability. Regulation? Totally neccesary for the trillions of dollars making it's way into small markets (read as hedge funds/metals). Oil is a different story nobody knows the truth behind it, was it all about speculation? don't think so but let history tell us in 20 years from now what really happened. We don't even really know the who owned the springboard for the jump of EUR/USD to 1.60, bad data? come on I don't remember to have seen good economic data out of the US in a long time except for 2006.

2008 Sep 11 05:49 PM

[Cesato:]

And yes, buy gold gold but not now buy it for 630 in December 2008 provided that the USD has not been pushed down below 1.32, otherwise stay paper gold short until January 2009.

2008 Sep 11 05:55 PM