We've heard it all too many times. Still hearing it: Gold will continue to move higher.
Even if possible based on the lack of faith in global leaders, or a fiat currency, you must remain cautious when signs begin to literally throw themselves at you. No investment goes the way you expect it, indefinitely.
I don't care if it's stocks, bonds, widgets, antique toys (in original packaging), nothing goes straight up forever. For example, back in the 1930's investors were convinced radio stocks would never falter. Radio was going to "change the world." And it did. And the stock market got bored with it. Been there done that. Ostensibly, what's hot goes cold.
How do you sniff out a top in the shiny stuff (or anything else)?
1). Know the signs from relatives. Watch for Aunt Bev calling and demanding you own gold because the world is indeed over, or at the minimum, going to heck. Vengeful gods accept gold as a medium of exchange for souls. Didn't you know? Ok, not that accurate an indicator. But count it as a warning sign. Please?
2). You notice consistent bantering about gold in elevators, on escalators. Or on rude, loud cell phone discussions at the supermarket or the movies, or in public restrooms. I give you permission to eavesdrop. Bragging about an investment is a bad sign. Money loss is imminent.
3). Metal detector sales are through the roof. Top global retailers of such equipment are experiencing a revolutionary boom in volume. Minelab, a company out of Australia that sells high-end metal detectors (about $5,600 each, not a typo) moved $118 million worth in 2010. That's more than twice the sales numbers achieved in 2009. In 2012, gross revenues for metal detection products were strong but beginning to tail off from the peak in 2010.
Have you lost a spouse, significant other, or friend to metal detecting? If I'm out $5,600 not including shipping and handling, you can bet I'm not seeing you anytime soon. I'm planning to be feverishly obsessed with uncovering precious jewelry you lost on the beach. Probably best you move on. I'm busy. This actually happened to a female friend I know in 2011. She's much happier now.
4). More people are wearing apparel professing their love of gold. I don't care if it's a hat, t-shirt, dress, doggie shirt, whatever. It's a sure warning sign of a top.
According to ElvisBlog.net, a comprehensive authority on all things Elvis, the King wore a gold lamé suit for a performance in March 1957. The suit was designed by famous clothing artist to the country stars, Nudie Cohn. Yes, Nudie (go ahead and laugh, it's fine).
In 1957, gold was $34.95 per troy ounce.
A decade later in 1967 (Elvis was making embarrassing movies singing to racing cars by then) gold was $34.95 per troy ounce.
Is it a coincidence that you made zilch in gold for ten years? Maybe. Maybe not. Respect history because we do similar things repeatedly.
4). Gold-related kiosks begin popping up in interesting or unusual places. You probably noticed more of them in your nearby mall. Oh and watch out for the gold bar vending machines and gold ATMs. They already exist overseas. And you've seen and heard the commercials, so many advertisements to buy or sell gold.
5). You're beginning to believe the stories how gold always goes up in recessions and depressions. Dr. Robert Prechter, author, financial analyst and founder of Elliot Wave International dulls the shine from this story using historical data. Excerpts from his research that appear in his E-book "Robert Prechter on Gold & Silver" are below.
In most recessions, gold has been flat or negative in return. The recessions in 1973 and 2001 were good for gold. Only two out of eleven recessions were beneficial for gold. Ten-year U.S. Treasury notes beat gold during every recession since 1945. T-note provided a capital gain in ten of the eleven recessions and also paid interest. The average total return in Treasury notes per recession is a full 10 percent, beating both stocks and gold.
5). Forty year-old nerds who live at home with their parents start blogs about gold. I've read them. Nothing against nerds or blogs, I love both but there are way too many nerds on the same side of the argument. It's what's called on Wall Street, "a crowded trade." It's like a boat with everyone fishing off the same side. By then the game is about to change.
6). Gold can be hoarded, confiscated (it's happened already), can't be valued as an investment (although some get real creative), and doesn't pay a dividend. You can only make money if you sell it. If you truly have a sell discipline for metal or anything else you own including investments, you're in the top .1% club as most investors are notoriously lousy at selling or trimming anything of value.
If gold can be hoarded that means you may not be able to access it. Governments can come break down your door (figuratively but don't test them) and take your gold away which means you should begin investigating an adequate burial place for your stash - like under a tree. Watch "Shawshank Redemption," for guidance.
Gold pays you nothing along the way. No income.
Gold can't be valued to indicate whether it's cheap or expensive. Valuation is based on fear and uncertainty. Measuring based on those metrics is anybody's guess.
As author, friend, investor James Altucher said on a segment of CNBC's "Fast Money,"
"Gold is a rock." Genius.
7). You can't use gold to buy toothpaste. Or anything else. I tried. I was tossed out of Walgreen's. So those people telling you it's a "currency" are wrong. I called to subscribe to a newsletter about gold and wanted to pay in gold. The operator and her "manager" told me they won't accept gold to pay for the newsletter on gold.
8). It's ok to hold some gold. Or other metals as part of a diversified portfolio. Two to five percent will work. I prefer GLD and IAU, the exchange-traded funds which actually hold gold bullion. If you're really daring, examine GDX which provides access to publicly-traded global companies involved in mining. I don't like catching a falling knife and have been out of all gold investments since December 2012. I'm now seeing a consolidation in GDX and thinking of committing a quarter of the money I've earmarked for this trade.
9). Expect "flash crashes." In everything: Precipitous, explainable moves in asset prices higher or lower. Thank the Fed for what I call "freakish asset flows" as money strives to seek returns or rapidly avoid losses thus herding and creating big returns (or losses).
Last, I do understand the allure of owning physical gold. We like stuff we can touch and feel. I can caress my house until the cops get called and take me away for indecent exposure. It doesn't mean my home is increasing in value. Or that it's an investment. A house is wood, concrete, dust (sometimes a rabid raccoon in the attic - true story) and gold is indeed, a rock.
If you remember that any investment can drop like a rock.
You'll be better off.
And richer for it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.