Famed economist John Kenneth Galbraith once said “Nothing is so admirable in politics as a short memory.” However, in markets, having a short term perspective is not so desirable.
The recent pull back in gold prices from their all time high in early December has unleashed a floodgate of articles calling it the end of the great bull run for gold. Amazing what a single month of gradually down-trending prices can do.
This is despite the fact that current price levels have just moved back into the range of where they were in November 2010. In the context of ten years of increasing prices, where we’ve seen gold prices move upwards more than 400% from January 2001 to December 2010, a month is probably far too short a period to judge an asset by.
CNBC’s charismatic Mad Money host Jim Cramer took time out of his show on January 19 to take a look at gold (full disclosure: my company Goldline sponsors a segment of the show). He re-emphasized many of the long term trends that have driven — and continue to drive — gold prices.
“If I’ve said it once I’ve said it a million times: you absolutely must own some gold in your portfolio,” said Cramer. “With the pullback in the price of late, you’re getting a terrific buying opportunity. It’s not a bubble,” he said.
Cramer spoke at length about a key component of rising prices: gradually increasing global demand by central banks, investment vehicles, and individuals at a time when gold is becoming ever more difficult and expensive to find and process.
“This is in fact, one of the simplest and easiest to understand stories out there,” said Cramer. “This is a scarcity story that is all about supply and demand. People all over the world want to own gold because it holds its value when paper currency is being devalued. It’s why central banks are buying the stuff. It’s a currency that holds its value. And even better, it is an incredibly scarce currency.”
In any market, it is very important to have a long term perspective when considering when and if to acquire gold. You should expect to hold your gold for at least 3 to 5 years, or even 5 to 10 years or more, to maximize the potential for price appreciation.
Scott Carter is Chief Executive Officer of Goldline International, Inc. and host of The American Advisor talk radio show.