September 3, 2006 –
In 2006, we stand at a vital crossroads in investing. After more than a two decade long bear market in a particular asset, we believe that we are poised to see one of the greatest bull runs of this asset of our lifetimes – a once in a lifetime opportunity to build considerable wealth leveraging this particular asset. Our belief is not only based on historical bull and bear markets in this asset, but it is also fortified with perfect geo-political and economic conditions and hundreds of hours of research that was performed to understand what drives the historical price of this asset.
The opportunity we at maalamalama speak of is gold. First of all, gold has eight qualities that make it an asset that everyone buys when they fear currency devaluation. Gold is:
(1) Durable & doesn’t corrode
(2) Easily divisible
(3) Convenient
(4) Consistent
(5) A commodity with intrinsic value
(6) A commodity that is accumulated and rarely ever consumed
(7) A commodity that will benefit from recent deregulation in major markets
(8) The commodity with the strongest opposite correlation to a falling dollar.
Currency is nothing but paper and has no intrinsic value. When people start losing faith in paper currency, they start buying gold and other things such as art that have intrinsic value. And here is why you will be one of the few people ahead of this curve when it happens. To make real money, you can’t buy when everyone else buys. It’s too late. You have to have the foresight to know to buy before everyone else does. That’s when the real gains are made. And if you listen to major media or read major media, you’re likely to be confused beyond belief.
In the past month, I’ve seen stories on MSNBC’s website about the demise of gold. I’ve read stories in major media about the demise of emerging markets. And this was literally just weeks after the major media was touting gold as the asset to buy and saying that if you weren’t in emerging markets you were missing out on great opportunity. Every day, the major media has bandwagon syndrome. Just look at some of the major financial websites online. Their headlines literally change in the course of a single hour, especially during the volatile global markets in mid-2006. I’ve seen headlines change from “Bulls lead recovery in stock markets” to “Bulls lose stomach, bears turn market sentiment downward” in literally an hour. No wonder the average investor is confused. Buy emerging markets. Sell emerging markets. Buy gold. Sell gold. Who’s one to believe?
Well that’s why we’ve dug well below the surface to get to the bottom of things. Gold is volatile, sure, but don’t confuse volatility with risk. Gold has bumped up to $620 an ounce since we invested at $570 an ounce, so are we patting ourselves on the back? Hardly. We know that gold is likely to see a steep correction before it goes higher, so if it pulls back all the way to $570 an ounce again, will we panic? No, because we’ve done our homework and understand exactly what drives the price of gold and why even short term, steep corrections won’t change our opinion of it.
Unfortunately the increasing ease in investing in this asset has also increased volatility. Speculative hedge funds can now buy and dump massive amounts of gold fairly easily by buying one of several Gold Exchange Traded Funds (ETFs) that are traded on the global stock markets. As well, millions of individual speculators can now easily enter and exit the market. Still the increased volatility that this adds to a historically volatile asset should not worry you if you’ve dug as deep as we have to understand this asset.
There are good and bad ways to buy gold.
Now, more than ever there are more ways to buy gold. Gold ETFs, gold exploration companies, gold development companies, gold futures, gold indexes, options on the gold indexes and physical gold itself. And buying gold the right way can literally be the difference from $10,000 turning into $22,210 or $80,321 (these are actual performance figures from different types of gold investments between 2001 and 2006). Invest in gold in the “wrong” ways and during this bull run, you may actually lose money. Not all gold companies are created equal. Even among the major gold producers in the world there are drastic differences in how these companies are managed that will manifest in drastically different returns in future years.
What??? That’s it? Talk about leaving someone hanging. You make me feel like a Ronin, a samurai that just lost his master. Yes, I understand the duality you speak of. That when an investment looks exactly the same on the surface in the same investment class, in reality, they can be drastically different below the surface. Many martial artists, when confronted with a physical threat, react instinctively without realizing that there are many other options to solve the situation. One should be still first and think before reacting immediately. This often leads to the better solution. In investing, one also has many options. But you just left us hanging. That’s just weak.
Thanks JKIM