The Gold Rush of 2008!
Monday, March 24, 2008 | Ethan Roberts Is this Spam?An article with a catchy title caught my attention the other day.
“Cashing In On $1000 Gold” declared the Associated Press headline.
It seems that recent media attention about gold hitting $1000 an ounce has brought all the little people out of the woodwork with their old broken jewelry, wedding rings from previous marriages, gold coins, and everything else gold or silver that can be found in the attic. They are now rushing to pawn shops, jewelry stores, and private gold buyers to cash in while the getting is good!
In a country that's up to its eyeballs in debt, with soaring gasoline prices and rising food costs, the Bush tax rebate (aka your 2009 money being given to you a year early) is not the only windfall about to be delivered to Average Joe and Sally this spring. $1000 an ounce means it’s time for Joe and Sally to sell their gold!
Oh how we love those big round numbers, and how the media uses them to trumpet the newest craze. Suddenly, I am reminded of that old Steely Dan song:
“Got a feeling I’ve been here before
Watching as you cross the killing floor
You know you’ll have to pay it all
You’ll pay today, or pay tomorrow…”
But there's more. Soon after discovering that first article, I discover yet another snappy headline, this time courtesy of my Internet Service Provider:
“Got Gold? No Better Time to Sell!”
The author begins by saying that, like many women, she has an assortment of gold jewelry that she never wears anymore. So she recently decided to take advantage of higher prices to turn her gold into fast cash. The bulk of the piece was typical common-sense advice on how to find a reputable business that won’t rip you off by paying far less for the gold than its true value.
“Do you throw out your gold teeth? Do you see how they roll?”
DING! DING! DING!
Now wait a minute! Contrarian bells are ringing fast and loud inside my head.
If Average Joe and Sally are selling their gold right now, doesn’t that mean that gold still has a long way to go HIGHER? Doesn’t Joe always sell at the bottom and buy at the top?
But the price of gold is up 20% this year and was up 30% last year. So this is hardly the bottom! Could Average Joe and Sally have finally gotten it right?
DING! DING!
Now I’m getting a headache. Will somebody turn those darn bells off?
If this is really the top of the gold market, why are so many gold and jewelry businesses, the stronger and more knowledgeable hands so to speak, buying at the top? That would not make sense. Surely the demand for gold is still there, or they would not be buying from consumers, and typically for 90% of value or better. And if this was the peak for gold prices, wouldn’t we be seeing the average consumer BUYING gold, just as they bought tech stocks and spec homes at their peaks?
Ah, but now it comes to me. My headache subsides and I begin to see the light. One of the articles goes on to describe how in 1980, at an annual average price of $612 an ounce, people were also lined up outside jewelry stores to sell their gold.
However, as the author points out, that price would be the equivalent of $1,660 an ounce in today’s dollars! So now I’m thinking, if that’s the case, we could still have 60% more upside to the price of gold, just to hit the equivalent peak of 1980! Could that be why so many businesses are gobbling up gold from the weaker hands which are so needy and desperate to sell?
Ask yourself: Why are Joe and Sally so eager to trade in a strong asset, with a clear and long term up trend still in place, for a weak, down trending dollar?"Got a feeling I’ve been here before. Won’t you let me help you find the door? All you got to do is use your silver shoes, your gift for the runaround.”
The answer: Because if the price hits a large round number like $1000, then the media leads us to believe that we must be at the top! They did the same thing when oil hit $100 a barrel.
But more importantly, you can’t pay your 60 day delinquent Visa bill with a broken piece of gold jewelry. And they certainly won’t take that old wedding ring at the local Texaco station, to pay for your $3.40 per gallon fill up.
Or will they…?
As I write this, gold is now pulling back off its recent highs, and will likely be setting up for another leg higher. Comex Gold Futures sit at 920 this morning. Street TRACKS Gold Shares (GLD), which is an Exchange Traded Fund (ETF) that mimics the price of gold, has dropped from 100.44 on March 17th, to a closing price of 89.91 on March 20th. That’s quite a volatile drop in just a few days.
One should always have a portion of their total portfolio in gold, and buying on dips is a good way to build a position. Just be careful with your entry point right now because GLD is still well extended above the 200-day moving average around 77, and is not yet back to oversold levels.
This gold bull market should have more upside ahead, and those who sell their jewelry now because they are forced to by financial necessity will make some money, but certainly not as much as they would by waiting. The real treasure, for those who are patient enough, could still be ahead.
“Dumb luck my friend, won’t suck me in, this time!”
(Song lyrics: Steely Dan, “Your Gold Teeth”, Countdown to Ecstasy, 1973)
