June 5, 2007 – Over the past six months, the gold bears have been out in full force, especially given the latest downturn in Gold this past May. Several months back, Timothy Middleton on MSN Money stated, “Is the party over? For gold, my bet is that it is. The party ended a week ago yesterday. Having reached a 25-year high price of more than $570 an ounce that Monday, the price of gold bullion began a two-day, 5% tumble that left gold at $544. Toward the end of the week the price was rebounding, but not to its peak level.” About a year ago, the India Times reported, “ Interestingly, gold is in a major bear market since May of this year. It topped out at $725 an ounce or 564.84 euro. Since then due to collapse in dollar, it just 10% shy of reaching the high in May, 2006. However, in terms of euro it is 18% short of reaching the same high…The bear market in gold is on. The investors investing in dollar will understand this stealth market when dollar rallies back above 90 in terms of dollar index in 2007-2008. At that time gold can plummet to $450 level.”
On June 3rd, just several days ago, an article appeared on MarketWatch titled “Gold ETF Loses its Glitter” in which this statement was made by Sonya Morris, a Morningstar analyst, “”The recent pullback shows speculating on gold is a difficult and dangerous game to play,” the analyst said.” Surprisingly, even the famed Aden Forecast, perennially one of the top ranked investment newsletters in the United States is up only 2.99% vs. 14.52% for the dividend reinvested Dow Jones Wilshire 5000 over the last 12 months. Their low return, according to a MarketWatch article, can be attributed to the fact that “gold has staggered”.
So what gives? First of all, other than the Aden Forecast, which is still bullish on the long term prospects of gold, the marked pessimism about gold as an investment vehicle among many analysts and investment professionals is staggeringly tragic. There is a secret about gold term’s short term price behavior that all of our members know and I won’t reveal that here, but I will reveal the following flawed logic of the above statements made by various investment industry professionals. The only reason analysts make statements like “gold is a difficult and dangerous game to play” is because they have no idea how to play it.
It’s like going to Vegas, slapping down a $100,000 buy in at a World Series of Poker tournament, and sitting at a table with all the big names in the game without ever having played a game of poker in your life. Then you proceed and believe that you actually have a realistic chance of going home with the $20 million pot, and within 24 hours, are out of the game and staring at a $100,000 loss. Everything is difficult and dangerous if you engage in it without having any knowledge of how to best play.
Even while the price of gold has been fluctuating widely over the past 12 months, I still own multiple stocks right now, as of June 6, 2007 that I’ve purchased within the past 12 months, despite this recent steep correction, that are still up 145%, 185%, 66%, 64% and so on. If I’ve made these types of returns during a major gold bear market, I can’t wait for the bull market to begin!
Sure, if you chase stocks as they soar and sell as they drop, you might be sitting on cumulative 40% losses (actually losses this wide should never happen as you should always use some type of stop loss order to prevent this from happening, even if it’s just a mental stop loss order). But if there are fundamental things you understand about the behavior of gold stocks that make buying at low risk-high reward entry points fairly transparent, then the difficult, dangerous game becomes infinitely easier and understandable. So the fatal flaw of day traders, financial analysts, and the financial media when it comes to gold is that all three subgroups are notoriously driven by daily trends only.
Gold strongly surges up, they all urge you to join the bandwagon and go all in. Gold strongly sells off as it did last month, spurred by heavy European Central Bank sales, and they all urge you to get out of the dangerous, difficult game. In a blog from last year, I stated that as an investor, you must be like a chess player, and think seven steps ahead of everyone else if you really want to build wealth. Day traders, financial analysts and the financial media only think about what is predictable within the next 24 hours so that they can all say “See, I told you that would happen.”
Furthermore, as I’ve done some further digging into the European Central Bank sales in May, you’ll see the bulk of sales was executed by Spain. Ask anyone living in Spain to explain the economic situation there, and you’ll understand the dire economic problems the government is currently experiencing and the fact that their sales were an act of desperation and necessity, and not one spurred by the fact that they think gold is a terrible investment (although this is what the Spanish central bank told the media, and in turn, the story that was digested by every gold speculator out there).
Surface level analysis, the only type engaged in by the majority of day traders, financial analysts, and financial media will never help anyone with long term investment strategies. On the contrary the insight which maalamalama members have will help build wealth (though I guess to be fair, day traders, by nature really never look to hold positions for longer than several days or a week tops, so for them to make profits, they really have no need to understand anything deeper than surface level trends. And some do quite well in this arena just trading trends, i.e. just think options traders).
[tags]investment education, investment strategies, how to build wealth, how to invest in gold[/tags]