On Gold and The Risk of Being Right

On gold and the risk of being right - investing strategy - MSN Money
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3/9/2012 1:40 PM ET | By Bill Fleckenstein, MSN Money
On gold and the risk of being right

Correctly assessing the impact of a structural or policy change is good, but you don't make money until other people start to agree. Take gold, for example.
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MARKET UPDATE US INTERNATIONAL

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Despite some downside fireworks on Tuesday, this week was a relatively "normal" week (whatever that means). As a result, I would like to step back and focus on some "big picture" issues raised in a Feb. 18 speech by Robert Rodriguez, a managing partner at First Pacific Advisors. Rodriguez is a smart guy, someone whose opinion I respect, and his speech, titled "Caution: Danger Ahead," got me thinking about a couple of ideas that I thought were worth discussing. For starters, Rodriguez describes a lesson he learned early in his career, when former Federal Reserve Chairman Paul Volcker, in late 1979, aggressively started raising interest rates to defeat inflation. "The stock and bond markets were slow to respond to this important policy change," Rodriguez said.
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"This led me to the realization that most investors, faced with structural changes, experienced a delay in their recognition and understanding of the implications of these changes -- 'the investor delay recognition period.' . . . Recognizing structural changes may mean that both strategic and tactical adjustments in the management of money are required" (emphasis added).
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Anyone know when the next bandwagon is due?
In all the world, just two swimming pools' worth of gold
I had never thought about inflection points in quite this way, but it is something that everyone needs to be aware of. What Rodriguez is saying is that markets take time to begin to thoroughly price in, or "discount," new developments. Said differently, they don't always do it right away or at the same speed. Each type of change is different. I get lots of questions from subscribers to my column at Buy gold on the dip? FleckensteinCapital.com about why the bond market doesn't see this, or why the gold market doesn't see that. Of course, I don't know, but sometimes I can guess. The point is that it often doesn't matter, because markets tend not to discount things . . . until they do. The really important lesson is that it is crucial to understand important policy changes and what they may lead to. But where you often make the big money is recognizing that others have started to recognize that something has changed. Oftentimes there will be a catalyst for either of those two events (i.e., changes in policy or recognition of change). However, in my experience, being right about the impact View more MSN videos of some event is certainly wonderful, but it is really profitable only when other people start to agree with you.
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Gold: It's elementary

As an example, let's look at the 12-year bull market in gold. One reason I aligned myself so aggressively with gold in 2001, and at various points along the way, is because I thought that the response to the equity bubble was going to be money-printing. With former Federal Reserve Chairman Alan Greenspan being the idiot that he is, failing to learn any lessons, money-printing is what we got. This fomented the housing bubble and credit crisis, to which the obvious response would be even more money-printing.
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As more people have started to catch on, the gold market has had spurts of fury based on new catalysts that have caused more people to understand what is really happening. Thus far, most of the big demand has emanated from India, China and, to some degree, Russia. U.S. investors are not too keen on gold or gold stocks. At some point, that will change, and if you can identify when that will be, you could then press your position in gold entities and perhaps, depending on your risk tolerance, make a lot more money. This is just one example, and there are many. But I thought Rodriguez made such a great point, one I hadn't previously thought of, that it seemed worthy of elaboration. For some more great perspective on investing, particularly in gold, I highly recommend two presentations by Grant Williams, "On the Simplicity of Owning Gold, Parts 1 and 2," available at ZeroHedge.com. I find the content on ZeroHedge oftentimes has some pretty wild-eyed ideas, but occasionally there are really well-done efforts on the part of its contributors, and this particular discussion of the gold market, especially the second part, is excellent. I encourage everyone to look at it.
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On the air
In my latest interview with Eric King, we cover a wide range of topics, including the recent lurch in the metals, questions about Spain and the euro, the miners, positive signs in the economy and the implications of higher oil prices. Interested readers can listen to it here. At the time of publication, Bill Fleckenstein owned gold. This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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19 Comments
NEWEST OLDEST BEST WORST CONTROVERSIAL
4 von 11
13.03.2012 21:28
WILLIAM HALAMICEK (Barassas)
14 hours ago
Well, gentlemen, aside from everyones bombastic posts, one thing is clear. With government debt caused by socialist governments(including the United Socialist States of America, if interest rates could or will rise, it would cause the essential bankruptcy or these same countries, as they will not be able to pay off the debt without extremely punishing tax increases upon who? You, me, or the rich, LOL! Guess who, it will be everyone. If you think that the current radical inflation, which the government lies about constantly, is not a de facto tax, please quit posting here, as " You cannot fix Stupid". World War III might be the endgame. Do not dismiss what Fleck has to say offhandedly. Unfortunately, at least this time, he may be correct. 0 0
MirageGuy
Mon 2:51 PM
Can someone tell me when has the FED ever been right? They are wrong about everything. Buy Specie, or get ready for your "Haircut", Greek style... 3 1
RLG09
Mon 1:51 PM
Just before the dot com bubble collapsed, everyone was an expert. Cab drivers were offering stock tips. Now what do we have? The cab driver is now an economics professor who can summarize all of the macro-economics hype he read on some "buy gold now" website. With gold posting those incredible returns in recent years, the gold bugs are very puffed up with confidence. But with all the newly minted economics experts out there, do yourself a favor, read the handwriting on the wall, and get out of gold now while you can do so without losing all your $$. Iron Mike 76 is right. And speculation has pushed GLD to ridiculous levels. If anyone is the idiot, its B-Fleck for encouraging people to stick with gold. 11 4
Iron Mike 76 I'm with Stromprohet on gold.
Mon 12:56 PM
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Gold has no fundamentals. The intrinsic value of gold does not change. It may go up in value to match currency devaluation, preserving purchasing power. Gold is savings, not an investment. The reason that gold swings up (or down) with much more volatility than currency is speculation. Remember the rampant speculation in the late 90s in stocks, or more recently the real estate bubble? Usually when everybody says it's time to buy, it's time to get out. You already missed the bull market. For all of you that are waiting for a revolution, anarchy, Armageddon, or the Rapture, just remember More 15 1
atep
Mon 11:23 AM
As I am writing this there are 20 entries. And 6 of them are spam dating sites. MSN is supposed to keep them off,but they obviously make too much money from these sites. MSN, you should be truly ashamed of yourselves. These spams litter every one of your strings, and they are literally the same spams word for word. Clean up these sites,and block them. Stop being a bad sponsor! 24 0
Cazande
Mon 10:47 AM
It's funny he mentioned Greenspan as an idiot. The man who said he was "lied" to during the whole economic meltdown, assured everything was okay. Does anyone really believe he dind't see this? Doubt it. That and he was a Raygun Appointee and we all know he was a F#*king idiot and a lot to blame for all this mess were in, ask Stockman. 9 18
Stromprophet
Mon 10:26 AM
This is true of the inflation of the 70's, the 20 year stock market and bond rally, the tech bubble, and the housing bubble. Logic would suggest that gold's current rise is a bubble,
6 von 11
13.03.2012 21:28
but the fundamentals for gold have changed in a major way. Almost spewed the coffee... Fundamentals for gold? Do tell, since it really has none. And it has been a 30 year bull market for More 11 4
EricTheRon13
Mon 10:16 AM
Thanks, that was a good video. However, you're right about Zero-Hedge in general--there's a lot of silly articles there. I remember one where the author was roundly dissing gold ETFs for being... well, ETFs. They quoted stuff from the prospectus that is common to every ETF and acted like this was some conspiracy to undermine your investment. (e.g. that only qualified agents create and redeem blocks of ETF shares) It just showed how little they understood anything. However, one more thing: If the reserves of the Federal Reserve are actually around 3/4 gold (???), then if the price of gold moved up by 1/3, it would cover existing currency completely (Right?). Of course by that time the Fed may have increased its balance sheet even more. But still, isn't this a possible limiting price? (i.e. around $2500 USD) 3 0
sprues2
Mon 9:55 AM
RL---------- if there is one sure fire thing, buying gold when a quasi socialist administration takes office, is it .April of 2008, as soon as I saw we were going to elect a quasi socialist, either Clinton or Obama, I cashed out and bought gold. Obama can't get at it until I sell it, will stay in gold, until the inept quasi sociaolist in the white house is an esoteric, historical footnote. Might get it to where you can take physical possession of it, and bury it in your back yard if Obama starts talking about making private ownership of gold illegal.
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ty153 @ fOOgAzEE:
Mon 9:15 AM
Since when did a 47% gain become unattractive? Hard to find an (any) increase like that in the equity markets. If affordability is an issue, see silver! TY 8 4
RLG09
Mon 8:46 AM
Fleck has made a career out of calling Greenspan, and most everyone else an idiot. Hey Billy, see that huge round object right in front of your face? That's called a bubble. When people figure out that the western economies will muddle their way through their problems, and that the sky isn't falling, they will dump gold. How many time does gold have to spike and crash before we learn our lesson? Fleck is a very good writer but his "smartest guy in the room" thing sometimes wears a little thin. 15 13
fOOgAzEE
Mon 8:03 AM
I'm pretty tired of the bulls telling the bears that they missed out on precious metals; especially GOLD! Considering that I'm 32 years old and had NO MONEY to invest in anything until I was in my late 20's; IT'S ESPECIALLY ANNOYING. However, these bulls are still in my ear on a weekly basis trying to get me to invest in GOLD. At $1700.00 an ounce, NO THANKS. How much can I afford??? Let's just say 50 ounces for argument's sake. An $85,000 investment would only yield $40,000 in profit if GOLD were to go up $800 an ounce to $2500!!! NO THANKS..... I like my chances at the blackjack table, the lottery, or even SILVER. Higher in demand, lower in supply, and much more useful than GOLD. Plus it's affordable. 17 6
Ray USA
Mon 7:49 AM
In 40 years of observing the economy and reasonably successful investing, I can say that all of the major fundamental shifts in the economy are telegraphed way ahead of time. This is true of the inflation
8 von 11
13.03.2012 21:28
of the 70's, the 20 year stock market and bond rally, the tech bubble, and the housing bubble. Logic would suggest that gold's current rise is a bubble, but the fundamentals for gold have changed in a major way. All the central banks are and will continue to devalue their currency in order to reduce the burden of their high debt (and secondarily to support their exports as all currencies are racing to the bottom). Since there is no end to this devaluation in sight, there is no corresponding end to the gold price rise in sight. When you think that our govenment and governments around the world have found a way to control spending and live within their means, it will be time to sell gold. Good luck with that! Buy gold! 30 8
saltguy your silly blog column? Talk about the Pot calling the Kettle black. 13 22
Mon 6:24 AM
Oh my now Feckenjerk, You call Greenspan and idiot while you do nothing more than try to promote
krewalandersen
Mon 3:55 AM
What's the Black Swan event that makes the masses realize the Western world is bankrupt... I mean wtf, it's obvious we're headed for some kind of currency devaluation. What really pisses me off is how the CB's are trying to manage this and thereby making the consequences worse in the long run. Let's just get this over with shall we? Zerohedge is a great site, and it's nice to see the MSM finally achknowledge it. Thanks Bill. I believe Santinelli mentioned them after the BLS report a few weeks back. It's about time Austrian Economic theory is seriously discussed as an alternative to current model. 13 10
9 von 11
13.03.2012 21:28
lostshep
Sun 11:28 PM
I enjoy hearing all of the Bulls telling all of the Bears how they missed a rally here, missed a rally there. I enjoy hearing the Bears talk of the crash to come. Question is, what happens when interest rates have to increase to combat inflation and the US can't pay the interest on it's debt burden? Or better yet, when ga**** $5 a gallon. Guess it won't matter what side of the isle you are on. 12 4
rousseauSC
Sun 6:36 AM
Maybe his record is spotted, like everyone else's, but even a blind squirrel finds a nut occassionally 14 2
BoomerST is ranked very low. 17 8
Sat 9:58 PM
Go to cxoadvisory.com. They rank the forecasting success of guys who make forecasts. Fleckenstein
BoomerST what he suggests. 21 14
Sat 9:56 PM
Fleckenstein has a record of being more wrong than right. Take that into consideration before you do
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On Gold and The Risk of Being Right - Investing Strategy - MSN Money

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MARKET UPDATE US INTERNATIONAL

Anyone know when the next bandwagon is due?

In all the world, just two swimming pools' worth of gold

NASDAQ S&P Russell 2000 10 Yr Note

3,039.88 1,395.96 831.23 98.84

+56.22 +24.87 +16.94 -0.84

+1.88 +1.81 +2.08 -0.85

Gold: It's elementary

Euro/Dollar Pound/Dollar Dollar/Yen

1.30770 1.57035 82.97000

-0.00739 +0.00614 +0.66000

-0.56 +0.39 +0.80

Best cars (and destinations) for a spring break getaway

WILLIAM HALAMICEK (Barassas)

Iron Mike 76 I'm with Stromprohet on gold.

BoomerST is ranked very low. 17 8

BoomerST what he suggests. 21 14

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