Jun 25, 2013|
Gold: What to do now?
Take your minds back to October 2008. You'll recall that the financial world was in total disarray. The US banking system was in great trouble and what more, its problems were leaking into the general economy. There were depressed sentiments everywhere. Unemployment was inching higher, business sentiments were low and investments were faltering. Clearly, the US economy was in the midst of one of its darkest days.
Then came an editorial in the New York Times urging people to buy American. The man making the suggestion was none other than Warren Buffett, arguably the most successful investor of all time. And why was he urging people to buy? Well, it was because of a simple rule that dictated his buying all his life. And the rule is nothing but to remain fearful when others are greedy and greedy when others are fearful. It was indeed one of the most fearful times in the history of the US economy. And people who would've heeded Buffett's advice and would have bought into fundamentally strong US stocks back then would have certainly laughed their way to banks.
We believe something similar seems to be happening to gold right now. It is making one low after another with each passing day and headlines everywhere seem to be negative as far as the outlook on the yellow metal is concerned. Unfortunately, given Buffett's aversion to gold, there's going to be no article by him this time around.
But what we can make use of is his simple rule to investing. In other words, will being greedy about gold at a time when others are fearful make sense from a long term perspective? Or buying into gold right now would be akin to catching the proverbial falling knife.
We believe what's happening to gold right now is nothing but a result of gross misconception. The misconception that the global economy is on the mend and the inflation has been well and truly tamed. Nothing could be further from the truth though.
Problems facing the global economy and US economy in particular have hardly been solved. Long term fundamentals remain as weak as they were few years ago and there seems to be no solution in sight.
What's causing gold prices to crater is that these problems have not yet made their presence felt. Sooner or later though, the reality will rear its ugly head and then everything could change. Seeing inflation wreak havoc on their savings, the 98% of US investors that don't hold gold right now would rush to buy a piece of the yellow metal, pushing gold prices much, much higher.
Thus, while gold seems to be out of favor with most investors right now and could even go down from here as most asset classes in correction mode do, the long term trend of higher gold prices seems pretty much intact. Therefore investors would do well to start stocking up on the yellow metal if they haven't already.
||Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.
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