My opinion on gold and silver

by Manshu on October 7, 2010

in Opinion

I try to keep the opinion pieces to a minimum here, and leave the final decision to readers, but the question of gold and silver prices has been coming up a lot lately, and I thought I’d do a post on the subject.

Almost one and a half year ago I did a post in which I said that it looks like gold is where the next bubble is, but it’s too early to call it a bubble yet. I have personally stayed away from gold all this time, and although I was initially interested in it, looking at all the other retail interest scared me away.

One of the rules I go by is that if everyone is interested in something, then it’s best to stay away from it – I feel that it’s only a matter of time that the thing will see leverage and speculative interest build.

To that extent, the presence of retail interest in stocks or oil or gold or whatever itself is a contrarian indicator. Since there is not much leverage built yet, and a lot of people are calling a gold bubble – you may say that it proves that gold is not a bubble, and that may well be.

Silver Prices 1792 - Present

Silver Prices 1792 - Present

Gold Prices 1975 to present

Gold Prices 1975 to present

Source: Kitco

However, keep in mind that asset mis-pricing happens all the time. You don’t really need for gold to get to a tulip mania style bubble for a big crash; just go back a little bit in time and think about how oil prices ran away. At $147 a barrel, oil was never called  a bubble, but was it mis-priced towards the higher side? I think history shows us that it was. At that time, it was very common to hear that China and India were driving oil prices due to their demand but when the barrel dipped below $40 no one talked about China and India driving demand anymore. In fact I did a piece on that about two years ago titled: Are China and India really driving oil prices? in which I said that in the short run oil prices may not come down, but in a longer time frame, they will come down to reflect the underlying real asset value, and though I don’t know what underlying value gold has – my personal opinion remains the same. Something will happen which will prick all this excitement around gold and silver, and the prices will come down to match more sane levels.

I probably don’t need to repeat this to regular readers, but it’s my duty to remind you that you shouldn’t take investment advice from random bloggers on the internet – your’s truly included.

{ 6 comments… read them below or add one }

Wenchypoo October 8, 2010 at 5:45 pm

You’re right to stay away from gold–the contrarian play is to buy when there’s blood in the streets, and run when there are tanks in the streets, and this would qualify as a tank.

Besides, after fees and taxes, you’d make a better return investing in yourself and your debt. Wiping out credit card debt earns you double-digit returns for a start. Filling a pantry guards you against the coming inflation. Paying off the mortgage may or may not yield a good return, but it would free up cash to invest elsewhere, like in a business which you can sell off sometime in the future–a possible 100% return.

The time to buy gold was back in 2001. Buying now would be akin to buying at the top, and after all the fees and taxes, you’d surely see a loss. So you missed THAT boat–so what! There’s a whole new fleet gassing up and getting ready to leave port eventually, and THOSE are the ones you want to be on.

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Steven and Debra October 9, 2010 at 9:42 pm

Many have been calling tops in gold since about 2006. One of these days a new top caller will be right on the money. The old top callers have faded into the shadows.

There are basically three stages to any bull market.

The stealth phase is the first. The investment mavericks pick an undervalued sector when it is completely out of favor with the herd and the load up the truck very cheaply.

The second phase involves purchases by institutional investors, central banks, governments, etc. Central banks just recently began purchasing gold.
The third and final phase is the mania blow-off phase such as we witnessed most recently in real estate when $10 an hour laborers were flipping a half dozen $300,000 houses at once.

Where are we in the precious metals sector? We are solidly in the second phase. How do we know the current market action is not the mania blow-off phase? It’s really easy. The next time you are in a social gathering ask those in attendance, how many of them own gold. Ask if any of them know how or where to purchase gold and how best to store it. When 7 out of 10 people can give positive and confident answers to these questions, a bubble has most likely formed.

What are other indicators of a bubble blow-off? Newspapers move articles about exploding gold prices from the back business section of the paper to the front page. In the beginning of the bubble formation the articles will be small. In the latter stages of the bubble, the front page articles will consume half the page or more. There may even be photographs of people waiting in lines several blocks long to purchase coins from their local coin dealer.

We are nowhere near a top in gold. The next time someone you know is calling for a top in gold without the indicators above being present, ask them the following question: Since you are now calling for a top in gold, did you also call for the bottom in gold nearly a decade ago? If they didn’t call the bottom in gold, nearly a decade ago, we would consider their prognostications on the future price of gold to be somewhat suspect.

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khalil nassour December 4, 2010 at 10:39 am

BUYING GOLD OR SILVER IS AS SELLING YOUR LIFE LOOK AND SEE THEY WILL DROP AS A ROCK FALLING FROM FROM THE SKY

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harish April 27, 2011 at 12:30 am

provide me the contact person details in india for hft

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Manshu April 27, 2011 at 1:47 pm

What’s hft?

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Kush May 3, 2011 at 8:22 am

I think by hft he means High Frequency Trading. It’s no good for normal people or even professionals for that matter.

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