Beware of the Gold Bandwagon

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“Time to hop on the gold bandwagon,” a Businessweek Headline reads. It sent a trickle of cold sweat down our spine. The attention of Business Week’s editors is the kiss of death for bull markets. It is the ultimate contrarian indicator. When an investment idea becomes so commonplace, so unimaginative, so widely known, and so utterly devoid of originality and good timing, it usually shows up on the cover of Business Week.

Granted, our favourite yellow metal didn’t show up on the cover. But a bullish article on gold… it has us worried. “Gold enthusiasts,” we are told, “see more good times on the horizon. True, the metal is still well below past glories. In 1980, the price reached about $850 per oz.- far more, when accounting for inflation, than its current value.

We nod nervously in agreement so far. As we’ve said in public, the price of gold will probably hit US$2,000 and beyond before all the dollar carnage is over. However, calling gold bulls ‘enthusiasts’ is a profound misunderstanding of gold’s role in the monetary system. People who like old cars and vinyl records and obscure butterflies and stamps are ‘enthusiasts.’ Investors buy gold because it’s a store of value when governments destroy paper money through inflation. You might buy gold ‘enthusiastically,’ but it isn’t a weekend hobby.

“But a number of factors may keep the shiny stuff in investors’ good graces. With the weak greenback, countries with vast dollar holdings, such as big Asian exporters like China and Japan, may want to diversify their currency portfolios…  Standard & Poor’s analyst Leo Larkin… says there’s been a “stealth bull market” in gold for about five years. ‘I don’t think the public is in on this in any meaningful way,’ he says. ‘This isn’t like the tech boom of the late 1990s.’ Even though public attention has been enraptured with outperforming stock indexes, he thinks gold will continue to climb.”

Predictably, gold has fallen about $5 in the last two trading sessions, in concert with the Businessweek write up. But we agree with the author about the public not being “in” on gold yet.

Gold is the salvation in times for financial apocalypse. Most people ‘get religion’ only when there are frogs and blood falling from the sky. That’s when they get down on their knees and pray… by buying gold. That kind of devotional buying hasn’t taken place in gold… yet. When it does, the next leg of gold’s bull run will begin.

“The Beijing-backed investment house Citic is believed to have waded into the share register of aspiring iron ore miner Fortescue Metals (ASX: FMG), underlining the commodity-hungry nation’s growing interest in Australian resource companies,” reads an article on page five of today’s Australia. It caught our attention for three reasons.

First, we posted a note on our website yesterday about what specific industries and countries are driving Australia’s booming export surplus. Iron ore is near the top of list, as are Korea, Japan, and China-three big steel makers. That combination means even if BHP and Rio Tinto ramp up iron ore production, there will be room for newer, smaller players in the market.

The second reason is that we just put the finishing touches on the December issue of Outstanding Investments. In that issue, we profiled a Western Australia mining services firm that earns a great deal of its revenue from crushing iron ore as an independent contractor. When a “major” like BHP Billiton Limited (ASX: BHP) or Rio Tinto Limited (ASX: RIO) ramps up, this is the type of company that gets subcontracted to do a lot of the actual work. It doesn’t hurt that the company also builds pipelines for the oil, gas, and mining industries too. In other words, it’s in prime position to benefit from increased capacity spending in the resource sector.

The third, and completely vain reason this Fortescue story caught our attention is that we saw a copy of “The Bull Hunter,” in a Dymock’s in Sydney the other day and turned to pages 115 and 117, where we found the headline, “The Global Mineral Grab is On.”

Here’s how we wrote about the efforts of Chinese and Russian firms to use dollar surpluses to acquire real assets, “A China post article commented on the pattern, ‘Unlike Japanese purchases of French Impressionist masterpieces, or showcase real estate in the late 1980s and early 1990s, China’s deals have been low-profile and focused on stakes in vital resources: oil, gas, minerals, timber, even fish.”

“The Russians and the Chinese-our former communist competitors-aren’t racing out to buy Google. They’re buying real assets all over the globe, even right here in America. These capital assets will help them compete globally. They’ll also produce new income.”

Wouldn’t change a word of it today. Some of the specific investment recommendations from “The Bull Hunter” might change a few years down the line. But the general investment strategy still makes sense, especially because the entire globe still faces the same threat, the crashing U.S. dollar and crushing U.S. debt.

On that score, here’s what my commodity trading friend Steve Belmont writes from Chicago, “The inverted yield curve, the imploding housing market and collapsing durable goods all seem to be pointing to a slowdown in 2007. Whether or not this slowdown materializes remains to be seen, but there are a growing number of key indicators that seem to suggest something is in the offing. Our concern goes beyond an economic slowdown. What we fear is a financial accident caused by the incredible leveraging of the global economy. And while we don’t pretend to be able to forecast when or if such an accident will occur, history tells us to beware.”

We agree. Beware!

Finally, we were surprised, concerned, and encouraged all at once that there are people who want to come to our Gloom and Doom Christmas Ball. Yesterday, we hadn’t even thought of it. Today, we’re planning for it. If you’re interested in meeting fellow contrarians, doomers, gloomers, optimists, pessimists, realists, essentialists, or just us, drop us a line at dr@dailyreckoning.com and watch this space.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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