Over the last couple of weeks gold prices have fallen through the basement or what technical analysts might call a “resistance point”. While the “gold bugs” out there are trying to maintain that “this time will be different” (I love when that phrase is used by people in the investing world – it’s almost never different by the way) relative to the steep declines that gold saw in 1980 and every other time gold has had a large run to some extent. In fact, I’d be shocked if gold didn't lose 40% of its value in the next 3-4 years.
No Skin In the Game
So where does this leave everyone? Well, I should admit right up front that while I was fairly certain gold was going to fall off of a cliff at some point, I did not put my money where my mouth was and short the precious metal. As a fairly young investor my portfolio is too small for me to go taking big risks like that, so instead I’ll watch my broad market indexes go up as investors finally wake up from their Glenn Beck-induced comas and realize that companies make money, not bars of a certain “special” kind of element.
The Golden Rule?
In terms of the greater economy, I think this rush out of gold by retail investors is an extremely positive sign. The reasoning behind that is the fact that the price of gold is largely a commentary of how people feel about other parts of the economy. There are no “fundamentals” to examine when considering gold like there is when evaluating a company. Even its metallic cousin copper is at least sort of tied to basic market truths dictated by industrial growth.
While a sizeable chunk of the world’s gold is used for jewellery (a complete luxury that the world could do without tomorrow), and it does have some industrial uses, the price of gold is dependent upon peoples’ general mistrust of the economic system. If you believe that money will soon become nicely coloured toilet paper and the overall financial system is going to fail, then the gold as a “safe haven” philosophy could look very attractive. If you believe that the world’s markets will continue to muddle through messes as they have for quite a long time now, and that companies will continue to generate wealth for their shareholders, then having more than 5% of your portfolio in gold makes no sense at all.
A Sign of Faith
This is why I’m happy that gold is going down. The more money flows out of this precious metal that doesn't do much beside sit on people ears and fingers, and into companies that I’m invested in (and which raise standards of living around the world I might add) the better off society is, the better the overall financial markets will do, and the better off my investment portfolio will be.
And let’s be honest, the main reason I’m happy about this plunge in gold is so that I can say “I told you so” to all the gold bugs out there. There is still a lot of bubble-popping left when it comes to this ancient form of currency.