Remember the days when you could throw a dart at the board and select a dot-com stock that would post double-digit gains year after year no matter what the real valuation of the company looked like? On March 10th, 2000 the NASDAQ peaked at 5133 on the back of the tech boom that had been driving stock prices higher for more than five years. Then of course the crash ensued and all of us who drank the Kool-Aid got burned. To be clear, gold is not in a bubble of this sort. Still, there are valuable lessons to be learned from examples of markets that are driven by traders and rumors.
Gold has spent the last six months bouncing between the mid $1500’s on the low side and $1800 on the top. That’s a fifteen percent trading range during a period where there have been essentially no drivers for gold in either direction. So what accounts for the swings? Traders buying on rumors. In fact, they are not even buying on rumors. They’re buying on loose interpretations of Federal Reserve language that is designed to be so purposely vague it seems to confuse even the Fed members who publish it.
For those of us who are long term gold investors, this type of market presents a serious problem. The problem is not the fact that the price swings are volatile. If we’re in it for the long haul, the daily fluctuations are essentially meaningless. The real problem is that they serve to distract us from the type of common sense decision making that has been a hallmark of successful gold investing for centuries. We seem to wake up every morning to another directional shift in gold prices, another $30 gain, another $30 loss, another talking head speculating that the bull market is over, or another assuring us it’s just getting started. As of late, everyone has become so obsessed with the daily movements that the bigger picture becomes obscured and ignored.
Let’s just call it how it is. Gold had no business hitting $1900 per ounce last summer. Much if not that entire move was a speculative reaction to the Federal Reserve’s quantitative easing programs. It was too much, too fast. Another round was expected this year and has yet to materialize. As a result, gold prices have struggled to find direction, as the Fed seems to change its mind several times a week. A lot of folks seem to have forgotten one important thing: it’s not the fact that the Fed instituted loose monetary policy that will drive gold prices. It’s the result of those loose policies that will truly matter…a result we have yet to see. That said, we all know it is coming.
Now this morning we have seen some serious chart damage inflicted. The traders have again grabbed hold, squeezing the gold market in reaction to the March Fed meeting notes. For the time being, gold will probably continue moving in a large trading range until some external market forces like inflation or dollar weakness kick in to start pushing sustainable gains. There will be a lot of distractions, but the real, long-term value in gold will shine through eventually. Just look back at the dot-com peak on March 10th, 2000. The people who traded on rumors got burned. The people who bought Apple stock that day because they felt the long-term value was solid…they paid $120 per share. Now it’s at $621. There is real value in gold. The question is: who’s going to look past the swings and see it?
Mike Getlin is Executive Vice President of Merit Financial, home to America's fastest growing physical gold IRA company. Please send comments or questions to firstname.lastname@example.org.