Fool's Gold (Part 3)
Saturday, July 10, 2010, by Stathis

Hopefully, after having read Part 1 and Part 2, you now realize that gold certainly isn’t a hedge against inflation; quite the opposite. Accordingly, a buy-and-hold approach is the worst possible investment strategy for the use of gold; that is, unless you happen to get in at during the early stages of a gold bull market.  

Similar to deflationary periods, major crises are short-term events. In contrast, modest inflation is a universal law. Therefore, gold should only be bought during times of crisis (ideally before).

BUT you should NOT hold gold indefinitely. 

You need to trade it like major financial institutions do. 

Otherwise you could get crushed (depending upon where along the spike you bought it). 

Remember, the price of gold is ONLY driven by supply-demand dynamics, which are driven by panic/crises and hype.

And yes, it’s also driven by market manipulation, which serves to alter supply-demand dynamics. But this creates an illusion (i.e. extreme overvaluation) that rarely lasts, and eventually comes crashing down.

The BEST use for gold is to capture price volatility via short-term trading. 

Its poorest use is as a long-term hold.

Now that the gold bubble has (likely) been established, you need to be very careful about buying gold here, unless you plan to trade it. Otherwise, you face the risk of being stuck with it when the bubble pops. The previous down cycle in gold lasted some 23 years. And some investors are still waiting to break even (after adjusting for inflation). 

So if you want to keep losing money, (which is indirectly transferred to these extremists - the perpetual doomers and gold bugs) by all means, keep on watching TV, keep on reading their articles scattered throughout the Internet.

I truly wish you the best of luck. 

Why should you believe me over the guys who make the media headlines? The financial media has fooled many less sophisticated investors into thinking their “experts” know what’s going on, but this just isn’t so. If you don’t realize this, you haven’t examined their track record.

Alternatively, if they do know what’s going in, they certainly haven’t communicated it publicly. You see, these guys go up against media bozos and other sheep.

But when they’re called up against a real expert, they run and hide.

That’s why none of these guys would dare even think to go up against me.

If you’re clueless, the financial media’s designated “experts’ may seem like they’re ahead of the curve, but compared to real experts – the guys you won’t ever see on TV – these extremists actually resemble infomercial salesmen.

Already, we see taking heads who have a lock on the minds of millions of sheep who suck up every word these liars preach. And now they have parlayed their sheepherding success into big endorsement dollars from gold companies.

This is a synergistic relationship, as it bodes well for "Obama bashing" and panic spread by these clowns so as to promote their political agendas, while sending money straight into their pockets and the bank accounts of gold dealers; money that has come from their sheep audience.

The sheep will get burned as they always do. And they will not learn their lesson as they never do. That is what makes them sheep.



I wouldn’t be surprised if Kevin Trudeau’s next book was focused on how to get rich buying gold.  


And I’d be surprised if Donald Trump doesn’t have one of his chumps working on a similar book.


Knowing we had a real estate bubble is not sufficient for making money.

Knowing we consume too much and produce too little won’t make you a millionaire either.

If you want to position yourself ahead of the curve you have to understand the intricate details within the big picture.

The perpetual doomers have missed the important details, as always.

And if YOU don’t understand the details, you’ll get burned just like they have.

So then, what’s gold good for other than jewelry? 

Not much other than trading; that is UNLESS you’re REQUIRED to stay in the stock market AT ALL TIMES. But who is, besides mutual funds and managed money? 

In other words, gold does outperform during global crises (with or without inflation) as well as deflationary periods (which do not persist). All that means is that it tends to hold up relative to other asset classes during market declines.

But if you were wise enough to get out of the market prior to these declines, you’d be in much better shape. You wouldn’t need gold as a hedge.

So if you must stay fully invested, gold is very useful for portfolio hedging because it has an inverse correlation with the broad market indexes like the DJIA and S&P 500, typically during severe bear markets. 

Many so-called “experts” (the gold bugs and perma-bears) insist that gold “holds up during inflation.” I’ve shown this to be false. For instance, when criticized about gold’s declining price several months ago, Peter Schiff proclaimed “it’s held up better than other assets relative to the market declines.”  

But Schiff failed to mention the real reason why gold has held up relative to the stock market. After all, he didn’t want to rain on his fellow gold bugs’ parade.

Ask Schiff why gold has held up better than other asset classes. If he tells you “because it’s a hedge against inflation,” you can look him square in the face and say “Wrong.”

The only reason why gold has held up is because it has a negative correlation close to 100% relative to the broad market indices. In other words, when the market declines by say 5%, gold rises by about 5%.

That also means that gold declines by 5% when the market rises by 5%.

Therefore, best use for gold is for those who hold traditional asset classes AND MUST remain invested during bear markets.

The next chart shows how well gold has served as a hedge against market declines over the past three years. It’s been a near-perfect inverse correlation (or a correlation coefficient of –1). 


Most investors have allowed the financial media to brainwash them with this mentality of finding assets or stocks that seem to hold up during bear markets.

The fact is that this “holding up” approach is for MUTUAL FUND managers who MUST remain in the markets at all times REGARDLESS how low the market goes.

But even professional money managers who are “in the know” typically only use gold for short-term hedges.  The gold price chart confirms this.

Now I don’t know about you, but it seems to me that the best hedge against market declines is to STAY OUT OF BEAR MARKETS! That’s the only way to avoid losing money.

Finally, I find it unfortunate for those who own gold, but have very little if anything invested in stocks, because as discussed, the best use of gold (other than capturing its price volatility) is as a hedge against market declines.

The bottom line is that if you’re holding gold, you had better devise an exit strategy.

And if you own gold but don’t own stocks as well, you’re missing out on gold’s true investment power; as a hedge against market declines.

The guys who move the markets know all of this—the really big institutions and hedge funds.

In 2005, my forecast for gold was around $1400 by around 2012-2014, and possibly $2000 to $2200 thereafter. 

But that does not mean that it will. And it certainly does not mean you should buy-and-hold gold. In my opinion, if you weren’t in gold at $600 or lower, you missed the boat.


Because gold could very well spike up to $1500 or even $2000 over a short time period, then come crashing down. So if you’re not an active trader, you could get stuck when the gold bull fades. 

I certainly won’t touch it at current prices, but that doesn’t mean it won’t go higher from here. I understand risk and I’m not willing to take it with gold at $900/ounce.

Once again, in my opinion, GOLD SHOULD ONLY BE TRADED, unless you want to expose yourself to significant liquidity risk. The higher gold is when you buy it, the higher the risk, since gold will eventually come back down to historical levels.

The only exceptions to this rule are for those who:

  • Must remain in the stock market and want to hedge against declines
  • Bought gold during the early stages of a bull market

If you bought gold above $600, you should consider actively managing your position. At the very least, you need to set a reasonable exit point. Otherwise you could end up like the guys who have been holding gold for 30 years, still waiting to make money. They bought Fools’ Gold, and they’ll gladly sell you theirs if you’re interested.

After reading this multi-part series on gold, I suspect there will be a lot of gold investors who are now fuming; others will remain in denial. But hey, don’t blame me; blame the guys who spread these myths about gold and inflation. As I’ve shown, they’re absolutely wrong.

Better yet, you might take some personal responsibility.

Next time, use some common sense and research what you’re investing in, or else seek the guidance of an expert who has no agendas or bias; that means someone who doesn’t sell securities, greed or fear. That means someone who’s not a part of the media club. Sadly, the global market for greed, fear and dishonesty is much larger than that for common sense, rational thinking and integrity. And that is precisely why there are so many sheep and sheepherders.

For those who doubt me, I’d say you’ve been watching too much CNBC and reading too many articles written by salesmen. 

For those who doubt me, perhaps you believe Bill Gross’s recent recommendation stating it’s a great time to buy bonds. Sure it is Bill! You’re a bond salesman after all. It doesn’t take a sophisticated investor to understand that now is one of the worst times to buy bonds. Credit risk is very high and interest rates are low. I prefer to wait at least until interest rates spike.

Most likely, Mr. Gross will continue to insist you need to be in bonds despite the contrary. Likewise, when the gold bubble does pop, you aren’t going get any warnings from the doomers and gold bugs. They’ll insist the massive price collapse represents a “once in a lifetime opportunity.”

But you can bet they certainly won’t be stuck holding gold when the price reverts back down to its historical mean. Then we will have another generation of suckers, stuck holding fool’s gold.

If you’re looking for more unbiased investment intelligence you won’t get anywhere else in the world, consider a subscription to the AVA Investment Analytics newsletter.




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