By MoneyMorning.com.au
One month ago, the spot price of gold was about AUD$1,835.
Today it’s AUD$1,672.
That’s an 8.8% drop.
When something falls more than a couple of per cent you feel it. Naturally, you start to question your reasons for buying it in the first place.
We mean, what if the gold bubble crowd were right? And gold is in a bubble.
After all, gold did fall. And who’s to say it won’t fall further?
Of course, we don’t want it to fall. And we won’t blurt out the old cliché that “we hope it falls so we can buy more on the cheap…”
But if you followed our advice and just bought gold a bit at a time, then the 8.8% fall isn’t all bad news. Because now you can buy more on the cheap…
Gold does better than stocks
In our view, the mistake would be to assume the gold bull-run is over… and to not top up your holding when the price has dipped.
Because that’s the key to buying gold and silver (silver has been hit even harder, down 18% in recent days). You buy in regular intervals – like a savings plan. That way you reduce the risk of buying all at once at a high price.
And besides, in terms of comparative performance we’d suggest the stock market spruikers put a sock in it. Any way you look at it, over pretty much any time period, gold has outperformed stocks.
Check out these charts:
The gold price in Aussie dollars is the pink line. The S&P/ASX 200 is the blue line.
Gold has outperformed stocks, even during periods when the bubble has supposedly burst. Of course, past performance isn’t necessarily a guide of future performance.
But at a time when the global economy is going through an unusual period, it’s important to remember why you buy gold.
Let’s illustrate with a few headlines taken from Bloomberg News this morning:
“‘Barrier’ Around Greece Needed: Merkel”
“Stocks Rise on Belief Policy Makers Will Act”
“Paul Ryan Sees Supercommittee Falling Short of Deficit Goals”
“Europe Faces Geithner, Soros Pressure to Defuse Debt Crisis”
“IMF Stands Ready to ‘Strongly Support’ Euro Area Recovery From Debt Crisis”
Then from the Age website. Three of the top five business headlines are:
“Saying goodbye to Greece – softly”
“Greek default ‘would destroy Europe’: Merkel”
“World in danger zone, says Swan”
Although to be fair, the Age doesn’t provide a quote showing where German chancellor, Angela Merkel actually says a Greek default “would destroy Europe.”
Fortunately, we could turn to our in-house German, Weekend Daily Reckoning editor, Nikolai Hubble. He told us exactly what Frau Merkel said in an interview with the German equivalent of Eddie McGuire!
According to Spiegel Online:
“Ein Austritt des Landes aus der Euro-Zone könne eine Kettenreaktion auslösen. ‘Zum Schluss sitzen wir mit wenigen ganz alleine da.’”
[Trans: “The exit of a country from the Eurozone could have a chain reaction. ‘In the end, we’d be sitting there all alone without much in our pocket'”]
And, “there has to be a way to enforce discipline in not abusing the bailout fund, ‘Sonst leben wir sehr gefährlich’” [Trans: “Otherwise we’ll be living dangerously”]
So, not quite “destroy”. But still, we smell trouble. Meanwhile, over at the Australian website, the top two business headlines read:
“$A weaker on Greek audit fears”
“Growth fears to depress bourse”
So, what does all this mean?
Well, the success to safe investing is to always question your beliefs. And then figure out whether what you’re saying is still right. If not, then you’ve got to admit it and move on.
We do that with the stock market, with housing… and with gold.
The question is: do we believe that any action taken by U.S. and European politicians and central bankers will have a positive impact on the economy? In other words, will bureaucratic intervention in the markets work?
The answer is, no. It won’t work. In fact, our bet is they’ll continue to make the whole darn thing worse. And that can only be good for the gold price.
Look, we thought the U.S. Federal Reserve would announce more money-printing at its last meeting. Simply because we thought they’d want to surprise the market with something big.
But now we’re starting to think the Fed is keeping the next round of money-printing up its sleeve… for when things get really serious… such as a Greek default perhaps.
However, Slipstream Trader, Murray Dawes isn’t so sure. He thinks you may have to wait longer. Before the last Fed meeting he said the only thing the Fed could do to boost the market would be to announce more money-printing. And that if it didn’t, the market would get smacked.
The upshot was, they didn’t and it did get smacked.
As he told us this morning, “the downside we’re seeing now is a result of all the money-printing bets being unwound.”
Murray thinks investors will have to wait until at least mid-next year for more money-printing… when Operation Twist ends. That’s unless the Fed decides to surprise the market to engineer a boost for stock prices.
Nothing is impossible. And that’s what makes it so hard for the ordinary investor to turn a buck in this market. Rather than relying on stock fundamentals, the direction of the market on any given day rests on the latest plans hatched by bureaucrats.
So, to put it simply: gold may go up… and it may go down. But for as long as we believe meddling in the economy will make things worse, we’re happy to tell you to keep holding and keep buying gold.
Cheers.
Kris
