This has turned into something of an essay, so consider yourself forewarned about its length. It's intended to be a brief lesson about investing in general, and ultimately about "investing" in gold in particular.
I'm going to be my contrarian self and take a big dump on everyone's favorite present commodity, glittering gold. First though, I want to present a few comments about investing in general. What is the aim of "investing"? There are two kinds of "investors" and depending on whom you ask, you may get two different responses. Obviously, the way you feel like answering that question right now is: "To make a profit." Now, that is true, but traditional investors and speculators, though they both may give that same answer, will often endeavor to arrive at that "profit" in two very different ways.
The traditional investor will, in the case of equities, try to arrive at a profit by participating in a company through the means of ownership, in a company whose future business prospects look promising, and, crucially, whose stock he or she believes does not presently capture the value of that promise. And often, they would like to receive a dividend. A speculator, on the other hand, is more solely fixated on price movement. Now, it is often difficult to disentangle the two because a traditional investor is fixated on price at some point: after all, he or she does, just as the speculator does, want to turn a profit.
So, how can one tell the difference? A great way is to ask yourself why are folks "investing" in something? And you must be honest about this, especially if you are asking yourself this question. If you find yourself obsessing primarily about the price, then you have your answer. And I have absolutely no problem with anyone being a speculator. I speculate all the time! So don't read into that anything particularly critical in nature. I am only laying that down in order to make a point later on.
Another point: in a long-term market cycle, an instrument, whether an equity or a commodity, will go through "bull" and "bear markets"; they will have periods of advancement in price, then periods of correction, then, hopefully, further advancement. Putting it all together, it is in those "corrective" periods during which traditional investors invest most heavily (i.e., Warren Buffett) and it is toward the end of the advancing periods when speculators tend to arrive (i.e., Dave Portnoy). And in fact, it is often the arrival of the speculating public, who have been attracted by the accelerating rise in prices that gives the tops of markets their characteristic shape. Again, I must emphasize that I have absolutely no problem with speculators, and as a matter of fact, I often engage in speculation myself. The reason I bring this point up is because knowing the difference between the two will help you to identify where exactly in a cycle you presently are. And that's what I think is important about gold.
One last point, and then I'll get to my point. Equities tend to have long bull markets and shorter bear markets, but commodities tend to be the opposite: they tend to have more rapid bull markets and longer bear markets (when compared to equites). Now, in the case of gold, where are we? Many people right now are insisting that gold is going to the moon. It's in the news, it's all over Twitter, the coin shops are empty, and I just saw a report today that showed that Millennials are now finding it attractive as well. Personally, when I see and hear so much public excitement about an investment vehicle, I know right where I am at. It's the contrarian's super power.
Now, as with the case with equities, "investors" in gold take two forms: traditional and speculative. The difference is that with gold, for instance, the traditional investor, instead of seeking the ownership and dividends of equities, seeks the preservation of wealth. That is what gold does. But, as with equities, gold speculators are attracted primarily by price. That part is the same.
And what I see everywhere right now is a broad public attraction to price. And in fact, I am seeing outright greed and excitement about the potential for the price of gold to skyrocket. Now, none of this is surprising given what the central banks are doing right now. But, as I mentioned above, honesty is critically important here. If folks are looking to "increase their wealth" (as opposed to "preserving it") by buying gold, then the speculators have arrived, and we are at some kind of top of a market, not the beginning of a new bull market. Again, I do not begrudge anyone from speculating in gold, hell, have some fun. But, it's important to know where you are at. Now might be a great time to have fun with gold, but it might not be the best time to buy and hold gold. Why?
Aside from the public excitement about gold, there are some clues in the chart, I believe. If gold is in the midst of a bull market, then we can divide the long-term chart thusly:
The problem with this chart is that, for a commodity, the bull/bear market timing looks an awful lot like an equity, not a commodity. It did not correct nearly long enough, I would think. And this is where, I believe, some basic Elliott Wave principles can be of great help. The price action from the end of 2015 until today does not look impulsive. Of course, someone who is bullish on gold will be able to find a bullish count in there, but compare this period to the period prior to 2011 and you should see some differences. Long, impulsive bull markets tend to look just like the period on the left, and when you see a lot of complicated "chop" and "overlap" of "waves" it's an excellent clue that you are still in a correction. Yikes!
But then how are we up so darn high in price, in a correction? The answer to that, from an Elliott Wave perspective is the "expanded flat." As with most "corrections" it takes a 3-wave form (as opposed to the impulsive moves which are composed of 5 waves). And it would look something like this:
Traditionally, B is higher than the top of the last bull market top (this encourage bulls and speculators, doesn't it?) and then C is often lower than A. Yikes!
Now, under what conditions could this happen? Well, I do believe we are facing an economic catastrophe, yes? If economic conditions worsen, we cannot eat our gold. Now, that said, if gold does take a tumble, and I have mentioned this in my prior posts on gold, because of further deflationary forces, it is possible that they print so much money that we get serious inflation, or, in an effort to save the dollar from collapse, re-peg the dollar to gold, but at a much higher price than it was before, either of which could set gold off on a new bull market. But, I don't think that we're there yet. Not with such a feeble correction in a commodity, and not with mom and pop buying the coin shops out of gold, and not with so many people salivating over the prospects of higher gold "prices."
The immortal words of Warren Buffett are really just that important, and yet so often overlooked: "Be greedy when others are fearful, and fearful when others are greedy."
I'm going to be my contrarian self and take a big dump on everyone's favorite present commodity, glittering gold. First though, I want to present a few comments about investing in general. What is the aim of "investing"? There are two kinds of "investors" and depending on whom you ask, you may get two different responses. Obviously, the way you feel like answering that question right now is: "To make a profit." Now, that is true, but traditional investors and speculators, though they both may give that same answer, will often endeavor to arrive at that "profit" in two very different ways.
The traditional investor will, in the case of equities, try to arrive at a profit by participating in a company through the means of ownership, in a company whose future business prospects look promising, and, crucially, whose stock he or she believes does not presently capture the value of that promise. And often, they would like to receive a dividend. A speculator, on the other hand, is more solely fixated on price movement. Now, it is often difficult to disentangle the two because a traditional investor is fixated on price at some point: after all, he or she does, just as the speculator does, want to turn a profit.
So, how can one tell the difference? A great way is to ask yourself why are folks "investing" in something? And you must be honest about this, especially if you are asking yourself this question. If you find yourself obsessing primarily about the price, then you have your answer. And I have absolutely no problem with anyone being a speculator. I speculate all the time! So don't read into that anything particularly critical in nature. I am only laying that down in order to make a point later on.
Another point: in a long-term market cycle, an instrument, whether an equity or a commodity, will go through "bull" and "bear markets"; they will have periods of advancement in price, then periods of correction, then, hopefully, further advancement. Putting it all together, it is in those "corrective" periods during which traditional investors invest most heavily (i.e., Warren Buffett) and it is toward the end of the advancing periods when speculators tend to arrive (i.e., Dave Portnoy). And in fact, it is often the arrival of the speculating public, who have been attracted by the accelerating rise in prices that gives the tops of markets their characteristic shape. Again, I must emphasize that I have absolutely no problem with speculators, and as a matter of fact, I often engage in speculation myself. The reason I bring this point up is because knowing the difference between the two will help you to identify where exactly in a cycle you presently are. And that's what I think is important about gold.
One last point, and then I'll get to my point. Equities tend to have long bull markets and shorter bear markets, but commodities tend to be the opposite: they tend to have more rapid bull markets and longer bear markets (when compared to equites). Now, in the case of gold, where are we? Many people right now are insisting that gold is going to the moon. It's in the news, it's all over Twitter, the coin shops are empty, and I just saw a report today that showed that Millennials are now finding it attractive as well. Personally, when I see and hear so much public excitement about an investment vehicle, I know right where I am at. It's the contrarian's super power.
Now, as with the case with equities, "investors" in gold take two forms: traditional and speculative. The difference is that with gold, for instance, the traditional investor, instead of seeking the ownership and dividends of equities, seeks the preservation of wealth. That is what gold does. But, as with equities, gold speculators are attracted primarily by price. That part is the same.
And what I see everywhere right now is a broad public attraction to price. And in fact, I am seeing outright greed and excitement about the potential for the price of gold to skyrocket. Now, none of this is surprising given what the central banks are doing right now. But, as I mentioned above, honesty is critically important here. If folks are looking to "increase their wealth" (as opposed to "preserving it") by buying gold, then the speculators have arrived, and we are at some kind of top of a market, not the beginning of a new bull market. Again, I do not begrudge anyone from speculating in gold, hell, have some fun. But, it's important to know where you are at. Now might be a great time to have fun with gold, but it might not be the best time to buy and hold gold. Why?
Aside from the public excitement about gold, there are some clues in the chart, I believe. If gold is in the midst of a bull market, then we can divide the long-term chart thusly:
The problem with this chart is that, for a commodity, the bull/bear market timing looks an awful lot like an equity, not a commodity. It did not correct nearly long enough, I would think. And this is where, I believe, some basic Elliott Wave principles can be of great help. The price action from the end of 2015 until today does not look impulsive. Of course, someone who is bullish on gold will be able to find a bullish count in there, but compare this period to the period prior to 2011 and you should see some differences. Long, impulsive bull markets tend to look just like the period on the left, and when you see a lot of complicated "chop" and "overlap" of "waves" it's an excellent clue that you are still in a correction. Yikes!
But then how are we up so darn high in price, in a correction? The answer to that, from an Elliott Wave perspective is the "expanded flat." As with most "corrections" it takes a 3-wave form (as opposed to the impulsive moves which are composed of 5 waves). And it would look something like this:
Traditionally, B is higher than the top of the last bull market top (this encourage bulls and speculators, doesn't it?) and then C is often lower than A. Yikes!
Now, under what conditions could this happen? Well, I do believe we are facing an economic catastrophe, yes? If economic conditions worsen, we cannot eat our gold. Now, that said, if gold does take a tumble, and I have mentioned this in my prior posts on gold, because of further deflationary forces, it is possible that they print so much money that we get serious inflation, or, in an effort to save the dollar from collapse, re-peg the dollar to gold, but at a much higher price than it was before, either of which could set gold off on a new bull market. But, I don't think that we're there yet. Not with such a feeble correction in a commodity, and not with mom and pop buying the coin shops out of gold, and not with so many people salivating over the prospects of higher gold "prices."
The immortal words of Warren Buffett are really just that important, and yet so often overlooked: "Be greedy when others are fearful, and fearful when others are greedy."
Comment:
Let me add one point. I do think that the central bank interventions are unprecedented and I believe they will only increase from here. I lean toward the view that gold has not yet completed its correction, which means it could go down in the short term, but long-term, I am absolutely bullish. To the moon and beyond.