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A sms from a friend elicited the following response from me: "Gold down like it was after Lehman. By nearly -20% then surged by 100 per cent. Will that repeat and does it matter what the daily price is?"
Based on the price movements since the collapse of Lehman, gold seems to have done a pretty good job of acting as a "hedge" or as "insurance" and a friend in bad times.
But could that story now be over? Has gold had its golden moments?
Could gold be moving into a bear market, just as it did from the time when the Hunt brothers were speculating in silver and gold (1979 to 1980)?
Well, the question has a hint of the answer.
The Hunt brothers were speculating in an environment where interest rates were being raised by central banks which were willing to kill inflation - and subdue the economy to wrench out the excesses. The impact of that was a dead stock market - and gold actually did better than US stock market in that 1979 to 1982 period (Graph 2). It took the election of Ronald Reagan as the President of the United States in 1982 to kick start in the economy and it was only in 1984 that US stocks began to outperform gold.
As an aside, note that there are now only a few central banks in the world (be proud to be an Indian, because the RBI is one of those few central banks!) that are willing to resist the pressure from the politicians to print money to get out of an economic mess. Yet, in every graph, the INR returns of gold has been higher than the returns from gold for a USD based investor, suggesting that the politicians in India continue to make us spend more and -despite the courage of the RBI - the political machine has its button on the printing press. That, according to me, is a good enough reason to be wary of inflation in India and to use gold as a hedge.
Is Gold now a rotten Apple?
To another friend querying the crash on silver, I sent an email: "Just bought on Thursday, before the crash, my first little investment in silver. Plan to increase that by 5x as it crashes. The table at the end of the Honest Truth still holds good. A great time to buy something (particularly gold) is when no one else wants it."
To which he responded: "And Apple? Not the one Eve held out to Adam but the one in Cupertino CA. ☺"
My sms to him on that was: "Apple has products that last a few years and then are useless. Gold lasts centuries. Graphs may be similar but underlying values are different".
Apple, the iconic consumer is "i" company, has been in trouble from product fatigue and competition since the latter half of 2012 and its stock price shows that (Graph 3). Gold peaked in November 2012 and has also shown signs of technical weakness and fatigue. After 11 consecutive years of gains, gold may be tired.
Unlike Apple, gold does not have to prove its relevance every quarter. Gold does not have to come out with an earnings report nor deal with the impact of poor communication skills of the management of Infosys.
No, gold has proven its resilience over history. It has outlived empires and emperors, it has outlived central bankers and their printing presses, it has been more loyal than politicians and the institutions they have occupied to debase the faith of the general public.
Gold is not bought because you want a quarterly return or an annual return. Its pay-off is over decades - a parent does not "mark to market" the daily progress of a child, one sees how the child progresses over long periods of time.
As Lord Byron penned:
"So, we'll go no more a roving so late into the night
Though the heart be still as loving and the moon be still as bright.
For the sword weighs out the sheath, and the soul wears out the breast.
And the heart must pause to breathe and love, itself, have rest."
Gold may be having a Lord Byron moment, but is silver to be avoided?
In previous Honest Truths, I have argued that silver, because of its "half precious metal and half copper" characteristic is subject to changing views on:
But, like I confessed in my email, I am keen to buy some silver - though have less of my money in silver than in gold - recognising the "downside" risk due to a slowdown in global activity.
So we will need to wait and watch to see what happens to the price of gold and silver over the next few days, weeks, and months (Graph 4).
Technically, all the charts look weak. But I am not buying gold and silver for technical reasons.
I am buying it for my security and as a hedge against inflation and the politicians and central banks that have gone berserk on the global stage.
Each of us has a different ability to absorb risk: the ability not to panic when one sees the price decline a day after one buys something - and to stay calm.
To remember why that "thing" was bought in the first place - and to test whether the hypotheses for buying it is still valid.
And please don't rush into buying all the stocks or gold or silver that you wish to invest in all in one day. Spread out your investment.
Buy your "base" position and add to this "base" as you get opportunities.
How much that "base" is differs for everyone - for that you need to get your entire financial plan in order.
Meanwhile, to take another quote from the poet Lord Byron, I hope my investments in gold and silver (which I am making with a 20-year time horizon) do not end up "in silence and tears".
But as long as there are trigger-happy central banks and promise-making politicians around, I don't think there will be tears of pain.
Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)