Gold falls; still a good investment
In the near term, things are actually looking up for the gold market, which didn't lose as much as expected
The low price of gold will cause many investors to pull out and miss a huge payoff down the road, Bonner argues.
Creativ Studio Heinemann/Newscom/File
Nothing much to talk about in the markets.
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Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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We had been expecting a bigger sell-off in the price of gold. The metal went down, about $300 if we recall correctly, but not as much as we expected.
In the last major bull market in gold, in the ’70s, the price declined by about 50% before going on to set a new record. The pullback in 1974 caused investors to question the premise of the whole bull market. Many dropped out and missed the big payoff.
Markets always test their admirers. The old-timers — such as Richard Russell — refer to the “50% principle.” A bull market can be expected to retrace as much as 50% of its gains…before going on to fulfill its destiny. If it goes down more than 50%, however, the bull market may be over.
Unfortunately, these are not hard and fast rules. Just old timers’ tales.
Still, they are useful for understanding how markets work…and for keeping you from making a big mistake.
This gold market barely corrected 20% of its gains. Is that all there is? We don’t know. Doesn’t seem like enough. We didn’t feel tested at all; did you?
That was part of the reason we thought the economy was sliding into a Rip Van Winkle slumber. It would be a real test.
Imagine that China slows down. Imagine that Europe lurches from one crisis to another. Imagine that the US economy follows Japan down that long, slow, slumpy road. What do you have?
Falling prices for almost everything — including gold. And with falling prices for other assets, investors, savers, insurance companies, pension funds all put their money into US Treasury debt. This keeps rates low and it allows the US to fund its deficits almost indefinitely. The economy never recovers, but it doesn’t die either.
Bernanke and crew may want to do something dramatic and foolhardy. But they wouldn’t have to. As in Japan, they could just bide their time…
Pretty soon, people would come to think that the world economy had entered a more or less permanent phase of low growth and low inflation. And then, what would happen to the price of gold? It would fall. People buy the inert metal to protect themselves from very ert humans. But if the humans who run central banks and Treasury departments sit still, why hold gold?
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