Why I find it hard to be bearish about gold

An old friend with a good nose for investment opportunities tells me gold is showing all the signs of an intermediate market top: loads of press coverage – articles in The Economist and Wall Street Journal; television stories marking the breach of $1,000 per ounce; and even the new Dubai GOLD ETF for retail clients.

Even the local Dubai independent financial advisers are recommending a small portion of capital now be allocated to gold to mitigate risk, while the rest should naturally still be invested in financial products that pay commissions to such experts.

The problem is that investors have rather tired of expert advisors over the past year or so. The investments that they recommended – mainly simple mutual funds – have tanked 40-60 per cent, while there is no sign of the experts handing back their fees.

Safe haven

And I suppose that is the reason to be very bullish about the outlook for gold and silver. People are searching for a safe asset class and protection from the financial markets.

Anybody who invested in stocks hoping for an Obama honeymoon has been cruelly disappointed with a 20 per cent bear market in the less than two months since he took office. What will his next genius initiative be: chapter 11 bankruptcy protection for General Motors?

So why would anyone fortunate enough to have gold or silver sell it now? It is not as though the financial crisis has improved, it seems to be getting worse.

The latest prescription from the Bank of England is to print money by a process known disarmingly as ‘quantitative easing’. More money in circulation equals inflation over time, although the new money might be hoarded to start with.

Feels like 1976?

We have been down this road before. In 1974 global stock markets crashed and governments resorted to inflationary measures to reduce debts and bail out their economies. Gold prices initially took a sharp fall in 1975-6, a bit like last autumn, but then surged eight-fold into a spike in 1980.

History never exactly repeats itself, and central banks will surely be trying to do it differently this time. But if you want to put some money on them making even more policy errors – and they got us into this mess after all – then buy and hold gold, or better still look at a diversified portfolio of precious metal stocks for higher performance, although you will have to live with the volatility as well, see: http://arabianmoney.net/make-a-fortune-in-gold/