There they go again – those so-called experts pontificating about investment bubbles when they really bought to know better. In case you missed it, or you live outside the UK, I'm referring to an interview broadcast on BBC Radio 4's Moneybox radio program this weekend (on 28 August 2010).
The interview in question was prompted by an inquiry from a listener who'd noticed that the price of gold had been rising consistently and dramatically over the last 10 years. He was therefore wondering if now might be a good time to invest in the yellow metal. To the BBC's credit, they were actually intrigued enough by the listener's inquiry to assemble a panel of three "experts" to offer their views on whether or not gold would make a good investment in these uncertain times.
Unfortunately, the BBC being the coseted, leftward leaning and slightly smug institution that it is, it made no attempt to hide the deep-seated neo-Keynesian bias which underpinned its entire approach to the program. The producers took the usual condescending tone towards gold investing that seems to be the default stance of most of today's mass media outlets. The balance of views expressed by the contributors to the program rather save the game away in this regard.
First up, we had the rather colorful Mr. Justin Urquhart Stewart from Seven Investment Management who has his equally colorful and breathtakingly ignorant views on gold, characterizing it as "a financial teddy bear". He continued: "you can stroke it, cuddle it and it's nice to look at, but it does not do very much." What a card he is – and what a mug you'll be if you actually take any notice of him. Still, I'm sure his observations generated a few titters among the less sophisticated Radio 4 listeners.
Just to fool you into believing that the BBC is free of any bias or predetermined agenda, the program producers then gifted a short sound-bite to the poor, beleagured John Stepek from Moneyweek magazine. He just about had time to make the very salient point that gold is likely to continue increasing in value for as long as governments continue to act with no sense of financial responsibility, when the BBC decided to bring out the big guns to flatten any notification germinating in the minds of its confused listeners that gold might actually be a useful asset to own in these troubled times.
Arch skeptical David Kuo from the Motley fool website was duly wheeled out and proceeded to reduce gold to melting point in his very own verbal blast furnace. "It's in a bubble!" he claimed. He helped point out that it's gone up over 300% in the last ten years but, in his opinion, the only reason for this is that the price is in a sort of "feedback loop", ie, the more people who buy it, the more it goes up, and there before the more people want it. Well how about that for an outstanding piece of top-of-the-line investment analysis and logical deduction – it's going up because … err … well, it's going up! You have thought someone writing for such a well-respected financial website would have been expected to learn a thing or two about the nature of investment bubbles before being allowed through its hallowed portals.
So before The Motley Fool start reviewing the terms of Mr. Kuo's contract, let me help him (and the BBC) out here with some serious and, hopefully, slightly better informed analysis of the gold market. First of all, let's deal with this "gold's in a bubble" nonsense with a few comparisons. I'm sure most of us can think back a decade or so to the dotcom investment mania. Now that really was a bubble. I can remember whole TV programs specifically devoted to tech stocks and which one was likely to make you a million overnight. I can remember people in the office talking about their favorite dotcom company and how their investments in tech stock unit trusts would allow them to retire in a couple of years. I can remember close friends talking about dot-com this and dot-com that when we went out for a curry (for the record, I refused to invest in these shares because I could not see where the value was – so I missed out on a spectacular boom and an even more spectacular bust).
Now let me ask you – and I want you to answer this honestly – how many close family and friends do you know who are investing in gold at the moment or who would even know how to invest in gold? Is it even on their radar? My guess is that if they do have a bit of money tucked away, it's probably tied up in some sort of high-charging, loss-making pension recommended 10 years ago by their trusty financial advisor, or its been "invested" in the yetr shaky-looking buy-to-let market. I would also hazard a guess that these friends may be a bit disgruntled of even slightly concerned about how their investments are performing, but they're not yet reached the stage where they're prepared to consider what, for them, would be a radical alternative and a leap into the unknown world of gold investing.
At this point you might find my own experience educational: over the last 10 years I have been carefully investing my own money in gold, silver and other conservative, value-oriented investments. As you can imagine, I try to educate friends and family about the benefits of owning gold and the risks of not owning it whenever the opportunity arises – but even I only have managed to convince 2 or 3 people close to me to grit their teeth, sometimes against their better judgment, and take what, for them, is apparently a real leap into the dark by investing in gold. So far, they have not been disappointed I might add.
So if you're evaluating things honestly, I'm sure most of you would admit that nothing like the sort of mania we saw around the time of the dotcom bubble or the buy-to-let property bubble exists in the gold market today. Now that's not to say that I do not think gold will actually end up in a bubble one day. In fact, I think gold will turn into the largest investment bubble in history, one that will be referred to generations from now – but I think we're a long way from that point at present.
At this stage you might find it helpful if we take a step back and have a quick look at the anatomy of an investment bubble. As Mr. Kuoought to have mentioned if he really is the savvy market commentator that he claims to be, bubbles usually develop in three stages. Stage one is when you get the smart money, ie one or two early birds who've done their research, buying up the asset in question on the cheap when no one else is interested (think UK property in the mid-90s). Stage two is when the big institutions and high net worth individuals start taking an interest, but Joe Public is still thinking about his next holiday in Marbella (think big banks and investment houses investing in dotcom companies in the late 90s). Stage three is the blow-off 'euphoria' phase when Joe Public starts raising his piggy bank and even borrowing up to his eyesballs to invest in this dead cert, can not lose asset (think UK buy-to-let boom 2003-2007) ). Can you detect any symptoms of euphoria in relation to gold at the moment? I certainly can not. If anything, Joe Public still seems competent to sell what little gold he has to the savvy marketing men at Cash4gold.com, never mind think to buy the stuff.
After the fact that gold has gone up by close to 350% over the last 10 years in pound sterling terms, it's still only in what I would call the early part of stage two of its bull market (or investment bubble if you prefer). In fact, I've gotten used to hearing characters like David Kuo claim that gold is in a bubble every year for the last ten years now – so that's naught out of ten for them.
My suspicion is that there's more than an element of sour grapes here as Mr. Kuo has probably missed out on this spectacular rise in gold himself and his ego can not stand the thought that he's been left behind by investors who take the trouble to research things a little more deeply than he does. He's failed to benefit, so he does not want you to either. Unlike Mr. Kuo, not only do I believe that gold is not in a bubble, I believe that gold, and to a lesser silver and platinum are now essential assets to own in a world where governments are trying to 'soft default' on their debts through reckless money-printing. Only this week, Chairman of the Federal Reserve Ben Bernanke declared that the Fed would do "all it can" to ensure US recovery. The fact that a long term economic recovery is not actually within the gift of any central bank is neither here nor there. What Mr. Bernanke has actually signaled that that the Federal Reserve is now ready to resort to more money printing or quantitative easing (the so-called QE2) in an attempt to "stimulate" the economy.
Where America leads, you can expect our very own Mervyn King at the Bank of England to dutifully follow. In other words, your paper cash is about to lose even more of its purchasing power and your government bonds or gilts are about to tank in value. I believe that this recklessness on the part of central banks is more reason than ever for those of you who have yet to take the plunge to take a deep breath and invest in precious metals.
Do not go to your financial advisor expecting soothing words and helpful advice on buying gold – gold does not pay commission so he or she just will not be interested. Do not seek advice from traditional media outlets like the BBC either which relates heavily for its economic comments on establishment academics who are still pathologically imbued with the news that gold is a "barbarous relic". Other media organizations are no better because they're rarely for their funding on advertising revenue from the big banks, and big banks hate gold even more than governments and economic intellectuals. The reason for this is that if a gold standard were reintroduced, banks' ability to expand issue of credit and profit from the interest would be seriously restricted because every unit of currency they issue would have to be backed by a set amount of gold – and for a banker, that's no fun at all!
So instead of relying on today's mass-media for information about gold investing, seek advice from reputable specialist websites, coin dealers and bullion vaulting services on the best ways to buy and store gold. Judging by his performance on the BBC's Moneybox interview, John Stepek at Moneyweek might not be a bad place to start either.As for you, Mr. Justin Urquhart Stewart, never mind financial teddy bears, I should stick to real ones until you're ready to invest like a grown-up.
Source by John Robert McDonald