AGE Gold Commentary is our regular report analyzing trends in precious metals and rare coins. We monitor domestic and international markets and extrapolate from our 30 years in metals to place current events into a hard asset perspective. View archives.
12/4/2001: The Big Picture (cont’d), Gold’s Future Prospects
Best wishes from Dana Samuelson, Owner of American Gold Exchange.
In this gold market update:
The Big Picture – Continued The Big Picture – Continued
The Dow Rebounds - Will Santa Clause Save Us?
Gold's Future Prospects
The Big Picture – Continued
In our last update we reminded you of what happened to the gold price in the 1970s, when it multiplied in price 24 times from $35 an ounce to $850. In that decade the United States experienced a period of severe economic instability, which included record high interest rates, rampant inflation, and a crisis of confidence in the U.S. as a world power. Although circumstances change for each new generation, history still has a way of repeating itself, and economic consequences can often be eerily similar from one period to the next
Unfortunately, we're off to a bad start in the 21st century. Of course, the "Roaring '90s" (as I now like to call them) certainly are a hard act to follow. Very rarely in the last 100 years have U.S citizens witnessed a full 10 years of stability, economic or otherwise. The 1920s, following the end of World War I, might be the sole example. The 1930s saw a worldwide depression. The 1940s brought World War II; and the 1950s, while economically prosperous, also brought the Korean conflict. The 1960s saw a rather good economic environment; but cold war fears and the escalating war in Vietnam all contributed to severe turmoil at home and abroad.
We need to remind ourselves that the incredible economic prosperity of the 1990s was a rare economic gift, not business (or life) as usual. Approximately half of all Americans invested in the stock market in the 1990s - far more than at any time in our history (the average is about 10%). Stocks became our national obsession; investors began following the markets like favorite sports teams, checking each day (or many times a day) to track the score for who won and who didn't. Making money in stocks in the '90s was like rooting for the New York Yankees: it was easy, because more than not they won. Well, guess what: the Yankees and the markets were both losers this year. And while the Yankees might come back to win it all in 2002, it's almost a certainty that the stock markets will not be financial champs again for a while, perhaps quite a while.
We all need to take a step back and get some perspective. The boom has given way to a bust. What was euphemistically called a "downturn" for the past year is now officially acknowledged as a true recession. What worked for our financial portfolios in the 1990s is no longer working today, and to hold onto the 1990s dream of windfall stock wealth is now (how can I say this politely) delusional. Nonetheless, driven by the media, most Americans continue to believe that stocks will soar again. Many still refuse to believe stocks (like Enron) can go bust.
So what's my point? Something pretty simple, really. Rather than reflexively pursuing the ghost of the Roaring '90s, it is time to get back to financial tools that carried us through the hard times of the past. And no asset has been more dependable for preserving wealth when times were tough than gold. After the great depression started in the early 30's, gold almost doubled in price between 1932 and 1935. In the 70's gold multiplied 24 times in price. Today gold is completely undervalued relative to stocks with really nowhere to go but up, just like it was in 1929 and 1968, following two previous record high Dow peaks. Does this surprise you? Not if you look at the big picture!
The Dow and Nasdaq Rebound - Will Santa Clause Save Us?
Since our last update the Dow and Nasdaq have both rebounded rather nicely from post September 11th lows but are weakening once more while gold has given up its panicked gains. But while the equities markets appear to be doing better, the fundamentals underlying these markets remain the weakest they have been in ten years or more. Most businesses continue to struggle following the strong slowdown in consumer spending. Corporate and consumer debt remains unusually high. Layoffs continue. The Fed has cut interest rates to their lowest levels in 30 years (just like Japan did following the Nikkei bust of 1990), so far to no avail. Yet stocks remain abnormally high in value with little real upside potential and an unusually high downside risk.
Many eyes are now turning to Santa Clause. The hope is that consumer spending will be re-ignited by the holiday season and our ailing economy will be rekindled. And the media (much like the CNBC market "analysts" cheered when stocks were soaring) will report whatever few positive signs do arise out of the holiday season. It is entirely possible that we could have a fairly vibrant holiday season economically. I really would love to see it. But I just don't think it's going to happen. Nor do I see a very optimistic outlook for 2002 at this point. But I do believe that if, as individuals, we can stay focused on the bigger picture instead of the daily media spin we're being fed, we'll be far more likely to emerge from this recession in good financial health.
Gold's Future Prospects
Increasingly I am asked, why won't gold rally? And what are the prospects for gold in the future if it won't rally now? The short answer is gold will rally (and rally decisively) when the pain people are feeling in their pocketbooks has increased to the point where they are forced to make the hard choice to give up the ghost of the Roaring '90s. So far this has not occurred. Today's markets are not driven as much by fundamentals as they are by mass psychology. And the masses appear to be in denial about the short term and perhaps the long-term prospects for the equities markets and our economy. Only after people have lost enough blood to the bear market in stocks (which has now begun in earnest) will they flock to gold.
But just as so many unseasoned investors flowed like lemmings into tech stocks late in the cycle, after the real money had already been made, many will also wait to invest in gold. These investors will want gold after it has already doubled or perhaps tripled in price. The smart money, like always, will be well ahead of the crowd.
Sure, the fact that gold hasn't rallied yet is discouraging. In fact, we may see one more low in gold before the real rally begins in earnest. I've recently used the diving board analogy to describe this phenomenon to customers on the telephone. As a diver approaches the end of the diving board, his movements cause it to bounce increasingly lower; but when the board is fully spring-loaded, whoosh, the diver simply takes off flying! Similarly, gold has been range bouncing up and down recently, and might bounce one or two more times. But the diver is getting near the end of his board; the spring is nearly fully loaded, and I do believe the price of gold is getting ready to take off.
I begged my mother to get out of the Dow when it was 10,650 and she reluctantly took my advice (whew). I've now stopped obsessing over the daily stock market moves, and at the value of the dollar versus other currencies. I truly think I know what is going to happen next. I'm now trying to focus on the bigger picture entirely. We've already passed a decisive turning point in an unprecedented economic boom cycle and the recession (bust) is here. Gold will be one of the few assets that truly prospers in this environment. I believe gold has the potential to exceed $1,000 an ounce and perhaps $2,000 an ounce. Gold will move cautiously at first and then more aggressively as the pain of recession forces the majority to give up the ghost of Christmas past and choose a more realistic investment strategy. Unfortunately for them, most of the big gains for gold will have already occurred.
Please, continue to accumulate gold while it remains so unusually low in price. It may prove to be the smartest financial decision you made in 2001.
American Gold Exchange
AGE Gold Commentary
Gold is gathering momentum to begin its assault on the previous record high of $1,911 and then push above $2,000 ... read more