When Prognosticator Extraordinaire Harry Schultz retired in December of 2011, the world of investors (particularly those of a contrarian bent) lost one of its most valuable (and valued) friends.
In addition to possessing a mind that was quite the crystal ball, “Uncle Harry” was good at coming up with clever sayings that simplified any given situation. The title of this article is a good example. It refers to those who offer commentary on the evolving gold saga.
If gold moves up $50 per ounce and remains there for a bit, investment pundits are likely to say, “Buy.” If it moves up $100, they say, “Buy!” At $200, the clarion call becomes, “Buy! Buy! Buy!”
Similarly, if gold heads south $50, the same pundits say, “Sell.” And so on. In a sense, this makes them appear to be knowledgeable, as those who are on the fringes of the gold investment market are able to see their favourite pundits riding along with the herd, whichever direction the herd turns.
The trouble is, by “chasing” the market, money is rarely made by investors. Truth be told, there are more losers than winners in the market. When they lose, they tend to tear up their tickets like bettors at the racetrack whose horses have just lost the race, and walk away dejectedly. But, amazingly, many investors keep coming back for more, following the same method that has repeatedly failed them.
Albert Einstein defined “insanity” as “doing the same thing over and over again and expecting different results.” Many gold investors, like bettors at the racetrack, or perennial losers at the casinos, will repeat the exact same mistake over and over with regard to their gold investments. Any attempt to help them by suggesting a real investment strategy is indeed like herding cats.
This trend is so prominent that veteran prognosticator Jim Sinclair has recently stated that he is receiving literally thousands of queries from worried investors as to what they should do, with gold having dropped below $1650. His advice has consistently been to tell investors to keep their nerve and not chase the trends.
But, if “chasing the trends” is such a predictable recipe for loss of wealth, what driving traits are responsible for the fact that such a large number of investors return again and again to it? The answer, as stated by some long-term gold investors, is that greed and fear are the drivers. My own assessment is a slight variation on this. I see it as greed, fear and impulsiveness.
All of us have greed within us to one extent or another. It is always tempting to think that there is a way that we can achieve financial gains more quickly than we could by going to work at our regular jobs for the day.
This is particularly true if we see our friends and associates appear to be passing us by in this regard. (I emphasize the word “appear,” as short-run gains are common in investment. Our friends may well brag to us about their gains, but, if they subsequently bomb, our friends are unlikely to be so talkative. It is therefore easy to see them as winners and see ourselves as non-winners.)
But, to my mind, the key is impulsiveness. The more impulsive we are, the greater the likelihood that, when we see the money train rolling by, we may want to jump on, without a clear plan in place.
Next comes fear. When we hear that our investment is headed south, our impulsiveness comes into play again, and we jump off the train quickly.
Greed and fear are not necessarily destructive traits, if we can avoid the impulsiveness that so often accompanies them. We can take the time necessary to develop a long-term investment plan, to do regular research on our choice of investment category. Then, the trick is to avoid getting emotional about the investment, to stick to the plan as long as the conditions follow the anticipated course.
All of the above will seem elementary to those readers who have long-since adopted this approach. For those who may just be beginning an interest in precious metals, a broad understanding may soon be essential. In the next few years, many fortunes will be made, but many more are likely to be lost.
The Long Ride
For those of us who have been in gold for over, say, ten years, there has been a nice, pleasant little ride to 2012. Whilst it may have been a lonely ride, as, in the beginning, there were very few who agreed with our reasoning, it has, generally speaking, been a long, comfy ride upward, with few major hiccups.
This will soon change. As we have stated since September of 2011, we are now leaving the eye of the economic hurricane, and the other side promises an infinitely wilder ride. As was predicted, since September, events have been increasing in both their frequency and their severity. In the near future, the reader may expect this trend to become even more pronounced.
Greece may not be one of the world's major players, but it will serve as a bellwether – it is likely to be the first in a series of dominoes to fall. A Greek separation from the EU (in whatever form) may be the trigger that will bring on an anticipated crash, and we may well see a period of deflation as a result. If this occurs, gold may go south, and the pundits will be crying, “Sell! Sell! Sell!”
On the other side of the pond, in America, we can expect further Quantitative Easing as a result. Few things could be a greater incentive for the Federal Reserve to set the printing presses into overdrive than deflation in Europe. In order to keep the good ship Titanic afloat a while longer, inflation would not only be useful, but essential. Dramatic inflation (if not hyperinflation) of the dollar will take place.
So what will this mean to gold investors? It will mean that we are in for a real rollercoaster ride. The daily and weekly fluctuations will be far more dramatic. The cats will be chasing their own tails, and the cumulative message will be “Buy! Sell! Buy! Sell!” as confusion and (in some cases) panic replaces thoughtful speculation.
This is the time when real nerve will be required – the time when the mania begins that some have been preparing for, for so long. When this phase of the gold bull market kicks in, a long-term plan and a cool head will be essential.
Our herd of cats will find themselves on a hot tin roof. Gold investment, over the next few years, will not be for the impulsive. But, make no mistake about it – for many who have been invested for many years, this will be the FA Cup Final or, in American terms, possibly the World Series. This is the big one that gold investors have been awaiting. It will be quite a ride. Seatbelts on.