Is all the focus on gold the sign of a bubble?
And what does one make of the conflicting promotions we read and hear about, with the newspaper ads telling us to bring in our old jewelry and other gold trinkets because gold is at an all-time high, while the commercials on TV blare out that it is time to buy gold.
"It's never gone to zero," proclaims G. Gordon Liddy, an unlikely personality for promoting gold, especially if the sponsors wanted an unquestionably honest spokesman.
So, is it a bubble? We say it is, but calling a bubble is a lot easier than predicting when it will burst.
Think back to the tech bubble, when new companies - many with no sales, let alone earnings - came to market with their initial public offerings and zoomed to irrational levels immediately. There was no question of whether that activity, trumpeted daily on the financial channels, indicated a bubble. The investing crowd got caught up in the euphoria, becoming speculators, behaving in a manner reminiscent of the Tulip Mania of the 1630s that we wrote about as the tech bubble of 1999--2000 grew.
It was a time of easy money - loose money by virtue of the Fed - with everybody making money. And if everybody was making money, then what was going on must be good - must be right. And it was said, "This time it's different," echoing the phrase that has cost the unthinking literally millions of dollars during the years.
The weak dollar, the rumors of a currency or basket of currencies replacing the dollar as the reserve currency, the huge and rapidly growing U.S. debt, all are part of the reasoning given for the current gold hype.
On the industrial demand side, end-users of gold have shrunk their buying of the precious metal, with evidence suggesting that most purchasing is coming not from them but from hedge funds and exchange traded funds. ETF symbols GLD and IAU are two examples.
Interestingly, in the last year, gold has underperformed against our broad markets as measured by the Standard & Poor's 500 Index, as well as the emerging markets (see emerging markets ETF symbol EEM). But no one has pointed that out.
Like the proverbial roller coaster, it will go down faster than it went up, so be alert if you own gold. We don't know when it will happen, just that it will.
Anecdotal market indicators
We call them anecdotal indicators, since they are not at all scientific. But it is interesting how often they have served as contra-indications of economic or market activity.
Some are local, as in my barber telling me he had put most of his investment funds in Intel. Unfortunately, that was only a few weeks before the tech bubble burst, taking Intel and its like on an over-the-cliff plummet.
And then there's the New York Times Financial Best Seller List, at economic extremes showing the public's proclivity to buy books with the most pessimistic economic outlook - usually a short time before marked improvement begins. On my bookshelf, there's a copy of "How You Can Profit From A Monetary Crisis," published in 1974, just prior to the beginning of the great bull market that raged until October 1987.
Then there's the infamous Business Week magazine cover of August 13, 1979, with the title, "The Death of Equities," creating a contra-indicator signal to invest. Equities did not die and smart investors, those who buy when fear is high and sell when optimism is rampant, were very well rewarded.
So where do we stand today with any of these indicators?
My barber has his money in certificates of deposit, earning about 1.5 percent. Hmmm, sounds like a positive market indicator.
The NY Times Financial Best Seller List has just two books in the top 10 that are about the economy/markets, and both are negative. Consider that a neutral indicator.
And Business Week? Talk about hedging! That cover shows a man ascending a stairway, with the title "Why The Market Will Keep Going Up." But if the magazine is turned upside down, there's a man descending the stairs, and the title is "Why The Market Is Going Nowhere." That doesn't help much, does it?
So, in our survey of anecdotal indicators, we have one positive and two neutrals, leaving us in the figurative no-man's land.
We prefer our fundamental and technical indicators, which remain positive, but I thought you would enjoy reading the anecdotes.
Clark Davis is a 37-year investment veteran and CEO of St. Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.
