GOLD – Time to Buy? – Before the Bell

Babe Ruth pointsGold – Time to Buy? – Investing in an asset class after a bubble burst is the fat pitch every hitter looks for. Gold bugs are stepping up to the plate thinking this is the opportunity of a lifetime. The yellow metal just broke to a multi-year low and is facing its first annual decline in years. Gold stocks like Barrick Gold (ABX) and Newmont Mining (NEM) have been hit even harder hitting levels not seen since 2002. Investors, who have long believed gold and gold stocks were the safe-haven trade, are finally starting to capitulate. Deep value managers are circling like wolves around an injured zebra ready to move in.

That fat pitch coming down the center of the plate is tempting. However, before you step up to pointing to center field like the “Babe”, consider the following: (Click Here to Watch the Babe)

Red Flags –

  • Wave of Gold purchases by ETF’s fueled the run-up are now driving the downside as they become net sellers
  • Infomercials throughout the media with has-been stars preying on people’s fears, run through the night on your favorite network
  • Gold scams proliferate with companies selling gold coins at inflated prices

Gold 1972 – 2004

Gold 75 2

It’s deja vu all over again!

GLD deja

Tulips, Dot.Com and Gold
  • Once a bubble bursts it can be a decade or more before investors return to an asset class
  • Shortly before the dot.com era imploded, investors were calling me looking to put all their assets in internet stocks
  • I witnessed similar behavior in 2011 except this time it was Gold

Gold Stocks

  • Gold stocks have fared even worse than gold in recent years.
  • Gold stocks will never return to the premium multiples they enjoyed now that investors can enter the gold market easily through ETF’s

Inflation

  • For the last several years gold bulls have been pointing to Quantitative Easing by the Fed as a catalyst for hyper-inflation. A lot of the money from QE was re-deposited at the Fed in the form of excess reserves. I fail to see how the news gets any better for gold bugs with the Fed heading to the exits.
  • The missing ingredient to an inflationary run is rising wages. Depressed wages and less than expected employment are secular issues. Water seeks its own level. While globalization has reduced the cost of goods we import, it also puts a cap on wage inflation. Until a good and service here is the same as it is on the other side of the planet, wages and jobs will likely be under pressure.

Bitcoin

  • Bitcoin is rapidly becoming a gold alternative to those who feel they must protect themselves with an alternative currency.
  • For now, it doesn’t matter whether it’s a store of value or a not. It only matters what the buyer believes.

Finally, consider this. With the exception of what lies in shipwrecks at the bottom of the sea almost every ounce of gold mined for the last several thousand years is still with us. If you still feel compelled to step up to the plate pointing to center field, best of luck. Just remember, Babe Ruth struck out 1,330 times in his career.