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Where art thou gold?

Recent market turmoil has been painful for many, and gold and silver investors have not seen the action they wanted recently from the gold and silver prices. Gold bugs have had to be patient and humble.

Gold is often cited as a safe haven, but it hasn’t rewarded investors in this way recently.

When is a safe haven not a safe haven? In a rush for liquidity when investors sell anything to raise cash. At times like these winning investment positions that are liquid are prone to being sold into a falling market.

Although gold bullion (and silver bullion) can fail to be a safe haven over the short term, it can deliver rewards over the medium and longer term. It all depends on what your time horizons are.

Arguements about the gold price

In the face of weak prices for gold and silver the usual naysayers have re-emerged. The most amusing member of this court is the academic Nouriel Roubini, who has been on Twitter to ask gold bugs where their forecast gold price of $2,000/ounce is.

We are always cautious of academics making market calls; they don’t have the skin in the game that professional investors do to focus their minds. It has also been interesting to see the wager recently made by Peter Grandich to Dennis Gartman here.

What was Roubini’s last big call on gold?

In December 2009 with gold at $1,100/ounce Roubini commented that “all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense”.

The market made a fool of Roubini for the next two years and gold is up 43%. Gold investors are not too unhappy about that. Silver prices have done even better since then.

Nouriel Roubini Gold Price Warning To Gold Investors

Roubini aside, there is a point gold and silver investors need to appreciate here.

Gold investors need to think long term

Investments in these asset classes should not be short term, and should not be expecting a guaranteed safe haven at all times. In the Credit Crunch of 2008 and 2009, another liquidity event, the gold price lost its directional trend, sold off, and then spent some time looking for a new firm direction.

The upward trend did reassert itself but it took time and some patience. Strong hands who own bullion found the experience easier than speculative players using leverage derivatives positions. Patience was required for the fundamentals to shine through once more.

Gold Bullion Investors Needed Patience

Notable gold commentator, Gene Arensberg, puts the recent weakness in gold and silver in this context:

One of the reasons precious metals have broken so hard is the one-two punch of a surging U.S. dollar and growing fear of European banks.  There is quite a flight of capital out of the euro at present, so this is not your usual commodity selloff.  With the big, … no make that huge banks in Europe scrambling to raise capital and with scared capital trying to get anywhere but where it is, there is a rush to liquidity.  Commodity trader/broker/merchants are creatures of credit, and a lot of that credit is tightening or disappearing – suddenly- so part of what we are seeing is forced liquidation on a pretty big scale. 

We are pressed for time, so to get to the crux of the issue, what is unfolding is longer term very bullish for precious metals.  But that does not count for much in a rush to liquidity.  Our bet is that this current down spike in gold will end up being a precursor of a follow-on rush out of fiat currencies again and back into precious metals.  But how much damage will be done before the liquidation is over, we can only watch and patiently wait to know for sure.

We find Gene’s explanation satisfactory and are patiently waiting for gold and silver to regain their composure. All the reasons that started to propel gold and silver higher in 2000 are still in existence, and if anything have strengthened.

Trends for gold and silver

Confidence in the financial and monetary system is still fragile, and declining in our opinion.

Jim Sinclair has urged that these continued fundamentals have been supplement by the failure of MF Global breaking the market mechanism; that which facilitates trade and settlement.

As John Maynard Keynes used to advise, “markets can remain irrational far longer than you or I can remain solvent”.

Continued volatility and downside risk for the metal prices thus reinforce our belief that most people are best served by owning gold bullion and not using more speculative investments using leverage.

Precious metals pausing for breathe

Gold may be in pause mode right now, and silver too it seems. Investors may need to show some patience and humility before being rewarded with higher prices.

Preserving and growing wealth sometimes involves resisting the psychological squeezes that occur at times during bull markets. There would be no opportunity if it was easy to ride a bull market.

Legendary trader Jess Livermore summed it up like this:

Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money

We wait satisfied with our gold and silver positions but with a keen eye on price action over the next quarter. We are sitting tight but with our eyes open.


Will Bancroft

For The Real Asset Company