We used to spend a lot of time looking at it.
We’d watch the price closely.
It’s up. Why?
It’s down. Why?
What does it all mean? Should we be happy or sad?
And then we realised it was pointless focusing on it day in and day out. So these days we let others do that. From time to time we’ll look at the price, but then we’ll quickly move on.
We’re talking about gold.
It’s up 9.7% since the start of the year, which while good still doesn’t beat the performance of one cracking Aussie stock. More on that later, but first…
We realised a while ago that we were hopeless at predicting the gold price.
We also realised that we spent far too much time trying to analyse it. Gold is, after all, gold. That’s it. It’s nothing else.
So we stopped paying it so much attention.
Don’t get us wrong, we like gold. We own gold. And you should probably own gold too. But the thing that most people criticise gold for – that it doesn’t do anything – is actually one of the key reasons to own it.
Think of it this way. When you buy a share of a company today, it may not be exactly the same company tomorrow, next week or next year.
When you buy the shares, the company may be in good shape. But what if within weeks the company’s main product develops a fault, or a competitor takes market share, or fashions change and the company’s product is no longer desirable?
What you thought you bought may not turn out to be the same thing that you currently own.
The same goes for a property investment. You may buy it today assuming one thing, only to discover six months from now it’s something else. You may discover a termite problem, or that someone plans to build a 20 story apartment block next door, or that you need to completely strip out and replace the electrical wiring.
Do you see what we mean?
Compare that to gold. The gold bar you buy today will still be a gold bar tomorrow, next week, next year or 100 years from now. Just as the gold jewellery made in the Middle East 600 years ago is still gold jewellery today.
The fact that gold doesn’t change is one of its key benefits. That’s what has made it a popular choice as a medium of exchange for thousands of years.
It means that when you need gold to be gold, well, there it is. Trouble is, most of those who criticise gold don’t understand that.
So, what is the latest news in the gold market? It’s a while since we looked.
But do you know what, having checked out the scene yesterday and today it feels as though we’ve never been away from it. The battle still rages about the point of gold, and whether it’s on the verge of another height-defying rally, or whether it will crash to earth with a thud.
Even the big banks, who usually move in lockstep when it comes to interest rates and stocks, can’t see their way to agreeing when it comes to gold. As Bloomberg reports:
‘This year’s rally with “flounder” absent a “more meaningful shift” in investor sentiment, Barclays analysts said in a Feb. 14 note. Goldman analysts led by Jeffrey Currie, the head of commodities research, said in a report two days earlier that gold will “grind lower” as U.S. growth improves, reiterating a forecast for prices to reach $1,050 by the end of the year.‘
Ouch! That would be close to a 20.4% drop from today’s price.
But not everyone agrees. According to the same report:
‘Today, UBS AG said in a report that U.S. clients are becoming “friendlier” to gold investing and that the price may trade in a range about $1,300.‘
Everyone has a problem valuing gold. Even the gold bugs would have to admit that. If the gold price was just about money printing, it would have to be at a record high today, because that’s where the US money supply is right now.
The following chart from the Federal Reserve Bank of St Louis proves it:
But gold hit a record high in 2011, when the US monetary base was about half of what it is today. And the gold price is 30.5% lower than it was then.
So the gold price isn’t just about money printing. The chart is proof of that.
So what does move the gold price?
The same thing that moves every investment (gold bugs won’t like this): human emotion.
What moves the gold price from US$600 to US$1,900 is the same thing that moves a share price from $10 to $80. It’s the belief that the prevailing price is cheap compared to what the price will be in the future.
We’re sorry if that’s too basic for the Harvard educated pointy-heads you see on TV, but that’s exactly how it works.
That’s why we don’t see any point in over-analysing gold. Gold itself doesn’t change on a daily basis, what changes is the economy around it. That’s why it’s important to consider the investing options in the broader economy rather than a narrow focus on gold.
For instance, gold may have turned in a 9.7% gain since the start of the year, but isn’t there a better way to punt on a rising gold price?
It turns out there is. One of Jason Stevenson’s favourite resource stocks has piled on a 76.8% gain since the start of the year. In other words, it has beaten the gold price by nearly eight-to-one. And Jason tells me it could have further to go.
This is why gold investors need to think about more than just the physical metal. There are so many other opportunities to profit from a rising gold price.
After all, the point of investing isn’t an academic exercise on who’s right or wrong about the meaning of gold. The point of investing is to make money. And right now, despite gold’s good run since the start of the year it proves one thing: the best place to build long term wealth is still the stock market…as the eight-to-one outperformance of Jason’s favourite gold stock proves.
Cheers,
Kris+
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