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***Reading comments or blogs by other investors, including myself, should never take the place of doing your own research before buying a stock, bond, mutual fund, or any other financial product. Passive investing and speculation, as described by Warren Buffett, can cause you to lose money.... More
  • Are we beginning to see an asset bubble forming in commodities? 0 comments
    Jan 15, 2010 12:31 AM | about stocks: GLD, SPY
    I decided to count the gold commercials on the television today and stopped counting at twenty. I checked the news on CNN's website and my attention was drawn to an advertisement for gold coins. Since I am an independent, I also checked the Fox News business section and about half way down there’s another gold advertisement, this time with prices depending on the type of coin and per oz. 
    While I agree the amount of stimulus and liquidity injected into the economy will cause inflation, the question still remains, how much and when will this occur. I still hold the view that inflation for the United States would be good over the short term. Wouldn’t inflation cause Chinese held US government debt to be worth less? Why would this be such a bad thing? Commodities had a wonderful run last year 40%+ and nearly 15%+ this year alone. The Wall Street Journal published an interesting article, titled “Fears of a New Bubble as Cash Pours In.” I have included a link below, google the title for the full article.
    I find myself pondering what utility does gold have beyond being a precious metal. Wouldn’t that incentivize more companies to mine for gold? If I remember my history that’s why Nixon took us off the gold standard because it didn’t accurately reflect a nations GDP. I am sure the basic theory of economics holds true, increased supply, shifts demand downward, thus a new equilibrium is achieved at lower prices. There’s no shortage of cash for gold commercials and people holding cash for gold signs outside of pawn shops, doesn’t this behavior scream bubble to you? Maybe not now but eventually right? I recently dropped off some gently used winter clothing to my local charity and was promptly informed they now accept used computers. It seems there’s gold in them thar machines and they're anxious to dig it out.
     There’s a couple of gloom and doom contributors on Seeking Alpha, warning us the economy will implode, explode and every possibility in between. However, the contrarian in me asks what if that doesn’t happen? I am reminded of the passage from chapter 8 of Benjamin Graham’s “The Intelligent Investor” which says “The farther one gets from Wall Street, the more skepticism one will find, we believe, as to the pretensions of stock-market forecasting or timing. The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking.” Yet there is plenty of skepticism going around today and predictions of gloom and doom abound but I am not buying it, are you? 
    Some investors may be scratching their heads, wondering why they missed last year’s rally and attempting to rationalize this mistake by forecasting the end of the world this year. Chapter 8 also addresses this behavior as well, “Timing is of great psychological importance to the speculator because he wants to make his profit in a hurry. The idea of waiting a year before his stock moves up is repugnant to him. But waiting a period, as such, is of no consequence to the investor. What advantage is there to him in having his money uninvested until he receives some (presumably) trustworthy signal that the time has come to buy? He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income. What this means is that timing is of no real value to the investor unless it coincides with pricing—that is, unless it enables him to repurchase his shares at substantially under his previous selling price.” The truth is we don’t know what will happen, it feels like a February pullback is in the cards but that’s just a guess. Meanwhile, there are plenty of cheap stocks out there with great cash flow, P/E ratios and divided payments. Mr. Market’s telling us all sorts of things these days but owning a good company at a fair price presents a better investment than a commodity that may or may not pay off over the short period of time. I guess that makes me an investor, not a speculator, which are you?  


    Disclosure: Long: ACPW, BAC, BCON, GE, ZBB
    Stocks: GLD, SPY
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