Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Markets Failing to Give Another AI Mega-trend Buying Opportunity - 6th Jun 20
Is the Stock Bulls' Cup Half-Full or Half-Empty? - 6th Jun 20
Is America Headed for a Post-Apocalyptic Currency Collapse? - 6th Jun 20
Potential Highs and Lows For Gold In 2020 - 5th Jun 20
Tying Gold Miners and USD Signals for What Comes Next - 5th Jun 20
Rigged Markets - Central Bank Hypnosis - 5th Jun 20
Gold’s role in the Greater Depression of 2020 - 5th Jun 20
UK Coronavirus Catastrophe Trend Analysis Video - 5th Jun 20
Why Land Rover Discovery Sport SAT NAV is Crap, Use Google Maps Instead - 5th Jun 20
Stock Market Election Year Cycles – What to Expect? - 4th Jun 20
Why Solar Stocks Are Rallying Against All Odds - 4th Jun 20
East Asia Will Be a Post-Pandemic Success - 4th Jun 20
Comparing Bitcoin to Other Market Sectors – Risk vs. Value - 4th Jun 20
Covid, Debt and Precious Metals - 3rd Jun 20
Gold-Silver Ratio And Correlation - 3rd Jun 20
The Corona Riots Begin, US Covid-19 Catastrophe Trend Analysis - 3rd Jun 20 -
Stock Market Short-term Top? - 3rd Jun 20
Deflation: Why the "Japanification" of the U.S. Looms Large - 3rd Jun 20
US Stock Market Sets Up Technical Patterns – Pay Attention - 3rd Jun 20
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Gold Glitters Once Again, Big Inflation Coming

Commodities / Gold & Silver 2009 May 22, 2009 - 12:05 PM GMT

By: Q1_Publishing

Commodities

Best Financial Markets Analysis ArticleGold is glittering more than ever.

All the fundamentals are in place for a big run in gold.


The “hot money” has found a new friend: gold and gold stocks.

As we looked at a few days ago, the big money pension and mutual funds are betting big on gold too.
The thing is though, despite all of the attention gold is getting, 95% of investors will miss the biggest prize of all. Here’s why.

Gold is “Cool” Again

A few days ago the world learned that leading hedge fund manager John Paulson has started to place some very big bets on gold too.

Paulson has become one of the most closely followed hedge fund managers – and justifiably so. He personally pocketed more than $3 billion and made his clients a whole lot more by betting against subprime loans while the housing bubble burst.

So when Paulson makes a move, the entire financial world watches. This time, although he’s betting big on “boring” gold and gold stocks, was no different. The blogosphere and financial media lit up when Paulson’s firm disclosed how much gold and gold stocks it had bought.

Paulson’s firm said it had $2.8 billion in SPDR Gold Trust (NYSE:GLD) and $638 million in Market Vectors Gold Miners ETF (NYSE:GDX). It also had taken 2.6%, 4.4%, and 11.3% stakes in gold mining companies Goldfields (NYSE:GFI), Kinross Gold (NYSE:KGC), and Anglogold Ashanti (NYSE:AU) respectively.

With such a big bet, Paulson is almost single-handedly making gold “cool” on Wall Street. And gold stocks have been steadily climbing over the past month.

Good Things Come to Those Who Wait

No one can deny Paulson’s success. He spots an opportunity, gets a big leveraged position, waits for it all to unfold, and makes a fortune for himself and his clients in the process.

We all see the opportunity in gold though. Everything is there. We have the pending devaluation of the dollar. We have a very small gold market relative to the investment capital sitting on the sidelines. We have China quietly announcing it is going to buy a lot more gold (China said it was going to up its gold holdings to 3% of foreign exchange reserves from 1.6% - no timeline given).

It’s all there. And now Paulson is betting big too.

This run seems inevitable at this point. There is, however, one very big consideration a lot of folks following Paulson’s lead are forgetting. And that’s time.

You see, Paulson is good – really good. But a lot of investors are good at finding opportunities. The difference with Paulson is he’s patient and disciplined enough to maximize an opportunity. Just take a look at his bet against the subprime lending market.

According to Pensions & Investments magazine, “Convinced that subprime mortgages would falter, [Paulson] did extensive research, hired staff with necessary expertise and in April 2005 began making a big bet, using credit default swaps to short the asset class.”

Think about that for a second. Paulson began betting against subprime mortgages in 2005. That was well before the housing market peaked and nearly two years before subprime markets started to falter in 2007.

He was right, but he was early. He stuck to his bet even though the housing market continued to do well. Eventually, it paid off.

Hot or Not?

How many investors do you know that are willing to wait two years or more for gold stocks to really pay off?

Two years is a very long time for Wall Street. And, when it comes to gold, there will be many “tests of will” (read: sharp corrections) which will sort out a lot of the weak hands.

First, the inflation/deflation battle is far from over. The deflationary forces of a credit contraction are incredibly strong. The Fed is printing a lot of money very quickly, but we haven’t seen much of an impact yet. Consumer prices still have barely nudged. Most of the run-up in gold and other real assets has come from expectations of future inflation.

Second, we’ve watched how the “hot money” hedge funds and traders don’t stick to a thesis for very long. Although the theses are completely justified, we have watched the average lifespan of a thesis decline to about two months.

For example, in the last six months sectors have fallen in and out of favor very quickly. Infrastructure stocks were very hot as the stimulus bill was being formed. The excitement hasn’t lasted. The for-profit education sector had a big run too. It didn’t last long though as expectations quickly exceeded reality.

The entire sector quickly started to decline even though companies were releasing stellar quarterly results. Now we’re seeing the “fix-it-yourself” thesis which ran auto parts store stocks to lofty highs come to a slow and painful end as well.

The theses just don’t last very long. And when stocks in the sector quit making new highs every week the “hot money” sells out and moves on. The dominant gold thesis will likely run its normal course in the short-term as well.

Finally, it’s going to take a long while (I’m expecting a few years) for the gold story to play out completely. The economy is still in a tough spot. Investors are still more than willing to lend to the U.S. government. Every element of an inflationary firestorm is in place, but there haven’t been any sparks yet. Gold looks great, but it’s just attracting a bit too much attention at the moment for me.

The Price of Impatience

That’s why I’m not running in to “Buy gold NOW before it’s too late!!!”

Right now, gold is the hot sector. Expectations are soaring and it is only a matter of time until the “hot money” finds something new. Gold is glittering now and it will do so in the future, but it’s best to buy it when it’s not being watched so closely.

Yes, I’ve bought gold and gold stocks in the past. I will be buying gold stocks again in the future. It’s all part of my personal investment plan which I’m sticking too.

Inflation is coming. Real assets and shares of producers of real assets will do exceptionally well in the years ahead. For now though, it’s best to look for value in the real asset sectors.

The recent run-up in gold stocks has made many other real assets look downright cheap. There is much better value in other real asset sectors.

For instance, silver stocks haven’t kept up at all with gold’s recent rise. Oil has done well, but it could do much, much better than gold in the short-term if the economy does show some signs of life over the summer. Probably best of all though, is the opportunity shaping up in agriculture.

In the end, gold is good. If you don’t have any exposure, get some. If you do, just let the rally play out and stick to your plan. Chances are, this time isn’t “the big one” for gold, the rally will fizzle out, and there will be another long dry spell where gold is no longer very “cool.”

In the end, Paulson didn’t get to where he is by running with the herd. He got it by identifying an opportunity, consistently buying into it, and then waiting for the big payday. That’s something we can all take away.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

P.S. That’s not the case for agriculture though. The way things are shaping up, there could be a tremendous short-term opportunity in agriculture on top of the exceptional long-term prospects. More to come in the weekend edition of the Prosperity Dispatch.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Q1 Publishing Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules