Gold Bugs, Old & New!

Gold investors endured a rough ride the last few weeks. Is it almost over? Is there a light at the end of the tunnel?

Some people think so. Others expect more weakness. Today I’ll tell you what some top experts are saying — and what it could mean for your resource investment strategy.

We’ll start with some newly converted gold fans.

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Gold’s correction may be already over, according to the in-house analysts at Deutsche Bank (DB). They look back at the painful 1980-’81 gold correction as precedent.

Back then, gold dropped from a record $850 and didn’t find bottom until hitting the $300 area. Then it took years to get above $400.

Ouch! A re-play of that percentage drop would mean we still have a long way to go.

DB doesn’t think history will repeat itself quite so neatly. The 1980s gold bear market came from Fed chairman Paul Volcker’s aggressive strategy to stamp out inflation.

Today’s Fed is not even remotely comparable. Volcker hiked short-term rates to 20%. All Bernanke did was meekly whisper the Fed might someday think about possibly turning down the massive liquidity machine.

I think DB makes a good point. The few tentative steps the Fed is taking don’t justify the sharp sell-off. Let’s see what someone with a longer view thinks.

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Famed hedge fund manager and commodities guru Jim Rogers said back in 2011 that gold was ahead of itself. At the time, gold was around $1,900. Rogers said it could fall to $1,200.

That forecast turned out to be spot-on. Rogers is no doubt brilliant, but he said in media interviews last week that it was just intuition. He simply thought gold was due for a correction after 12-consecutive yearly gains. A decline to $1,200 would be about 35%-40% from the peak — fairly normal for any asset class.

So what does Rogers’ intuition say now? Here is the direct quote from Business Insider.

“I’m not sure we’ve found the final bottom yet, it would make a lot of sense for gold having had 12 years up, to have at least a longer consolidation, a longer correction, maybe a few days, a few weeks, or a year or two. Why not 2014, 2015?

“My view is that gold is in the process of making a complicated bottom which could take a while. So I’m not buying gold. I haven’t sold any gold or silver, but I’m not buying any. I’m watching and expecting a new low, which might be lower.” (Source: Business Insider, July 6, 2013)

“A complicated bottom,” he calls it. Rogers says he isn’t buying gold, nor is he selling it. He’s waiting and watching. Sounds like good advice.

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I had a long phone call today with our own resource expert, James DiGeorgia. He stands by his July 1 analysis. Worldwide gold production costs are around $1,100 and that area should serve as support for bullion prices.

Below $1,100, gold miners actually lose money. Why bother pulling gold out of the ground when you can’t recover your investment, much less turn a profit?

The timing is tricky, though. Mining companies often “hedge” their future production with forward contracts and other derivatives. The process can unfold slowly.

Nonetheless, gold is a commodity. Commodity prices always respond to supply and demand. The cash price can’t stay below production cost forever. Something has to give.

James thinks we could see unbelievable short-term swings in both directions as this process continues.

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How should a gold investor react? I can only speak for myself. I have gold at the core of my “bucket“ strategy. This is personal to me. I’m risking my own family’s future on gold as part of our balanced approach.

Unlike Jim Rogers, I’m still buying physical gold. We have talked previously about the difference between buying and holding physical gold and paper gold. I add to my physical holdings at regular intervals. I’ve been doing it for several years and have no plans to stop.

If gold stays down in the dumps for another year or two, I’ll be able to buy that much more at a lower price. My average cost will decline. And my profit will be great when I do sell gold at what I believe to be much, much higher prices down the road.

As I said above, gold is a commodity, but it’s also more. Gold is the only real money on this planet. Its value does not depend on someone else keeping his word. Gold was the original money. When everything else falls apart, gold will still be gold.

That’s why I’m a gold buyer. What about you? Tell me why you own gold, and what changes you’ve made to your strategy.

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 Some other news highlights …

  • Today kicks off quarterly earnings season on Wall Street. Alcoa (AA) led the parade with a penny-per-share beat thanks to rising automaker demand. We’ll also hear from JPMorgan Chase (JPM) and Wells Fargo (WFC) later this week.
  • Earnings reports create headlines, but they rarely have more than a temporary impact on stock prices. Unless the “official” news contains some kind of surprise, the prevailing trends resume soon afterward.
  • Beleaguered computer-maker Dell (DELL) shares rose after a key pension consultancy advised shareholders to accept founder Michael Dell’s leveraged buyout offer.
  • Americans love their coffee. We appear to be buying more of it, too. Shares in Starbucks (SBUX) and Dunkin’ Donuts (DNKN) traded at all-time highs today. We may be the most-caffeinated nation in history.

We watch earnings closely around the office, but you aren’t likely to see a recommendation to trade earnings from your Uncommon Wisdom editors. It’s not easy to time quick entries and exits around not only what you think the results will be, but also how you think the market will react to them.

It’s much-less-stressful, and certainly more-productive, to invest in what you believe in …stocks and ETFs you’ve researched, solid option plays that can pay off regardless of what the headlines say, and hard assets whose prices may be beaten-down today but whose future values are where their real worth lies.

That’s not to say we won’t mention the occasional earnings report now that the reporting season has started. But just like the Fed, we’re looking for clues about where consumers are spending their money, what the overseas markets are looking to buy from U.S.-based businesses, and what the economic picture really looks like.

Tell us … are earnings a factor in your trading and investing, whether to put money to work or keep money on the sidelines until the reports dwindle in number? I’d like to know what earnings season means to you

Good luck and happy investing,

Brad Hoppman

Publisher

Uncommon Wisdom Daily

Brad Hoppmann originally grew up in Florida, but has lived in Baltimore, Charlotte and New York as well throughout his career. Always an athlete, he played varsity football and water polo at the University of Florida and received All-SEC/SCC honors.