If you follow the discussions in the financial world, you might have heard talking heads going on about the death of the gold bull. Don’t believe it. First off, I maintain that it’s a false premise that there are gold bull or bear markets at all because very few people buy gold as a speculative investment. Gold doesn’t split, gold doesn’t pay a dividend or report earnings every quarter and gold doesn’t buy back its own shares. If you want a growth investment, there are better options.
What gold has going for it is that it’s a finite resource with a certain intrinsic value. Because of its unique attraction through history, gold is an odd commodity, one of only a few that historically has functioned as part of a large-scale monetary system and still functions as a type of unofficial substitute currency. When discussing gold prices, it’s important to keep the perspective that gold has relative value against paper currency. So, when we talk about gold prices going up, we are, at least in some sense, really saying that the value of paper currency has gone down. Or, perhaps more accurately, that people have lost faith in paper currency.
It’s not all that simple as gold does become over-bought and over-sold on the spot market and is sometimes driven to wild, parabolic price spikes by fear and speculation and the exchange rate for gold to paper currency also fluctuates. Speculators do make money here and there and sometimes lose a lot. Speculating on gold is a fool’s errand and you have to stay focused on the big picture.
The factors that have propelled gold prices upward for the last decade are still firmly in place. Monetary policy that creates and destroys currency based on political expediency, central banks that create money as if by magic to suit the moment, and the concept of debt as money all conspire to make paper money a flimsy economic foundation.
Gold prices are suppressed now by a number of one-off factors that will pass. The collapse of MF Global forced the liquidation of a large number of commodities contracts, including gold, that the market is still absorbing. The dollar has been strengthening, which is really more of testimony about the relative strength of the U.S. economy compared to Europe, and we just cleared tax loss season.
I expect gold prices to recover and start to percolate back in sync with the market forces that have remained stubbornly consistent over the last ten years. Other than the insane times when the gold and silver markets are wildly parabolic, don’t worry about timing the gold market, unless you think paper money is making a come back.
Make your purchase decisions based on big picture trends and take the long view and relax. Monetary policy is still on your side.