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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary.
Gold Bugs Beware!
by Professor von Braun
June 10th, 2002
The run up in gold stock prices has been extraordinary given the fundamentals of this small group of producers of the yellow metal. Certainly given the fact that many of them have sold forward at prices below the current gold price, the actual profitability of these companies must be suspect. That's apart from the ridiculously high p/e ratios now being displayed by some that are not sold forward. This rally looks like a mini Nasdaq bubble and one can expect a substantial retracement at some point in the not too distant future.
The bullish consensus on gold in percentage terms is up in the high eighties, not a healthy sign, nor is the fact that the number of new players entering the gold market and buying gold stocks for the first time is relatively high. In particular some mutual funds have been buying for the first time and this begs the question, why now? Have they run out of bubbles to invest in?
Then there are the newspaper articles that have been appearing all over the world that tout gold as the safe haven investment. But safe haven from what? Uncertainty about paper currencies? Once again, when does the popular press ever get it right?
Then there are the cries, perhaps bleats is a better word, from certain quarters about Central Banks being out of gold and we can expect the gold price to go to the moon immediately, if not sooner.
It is an unfortunate fact that the investing public rarely get it right when it comes to picking trends, that's apart from the fact that bull markets do not begin with such high levels of enthusiasm. The public is usually the last to know and the last to get out. Even the stories about gold buying by the Japanese that have been used as "evidence" of the new gold boom have to be treated with suspicion. After all, when did the Japanese investor ever get it right?
The Swiss Central Bank still has a significant amount (900 tons) of gold to sell and then there is the announcement by the head of the ECB that the Bundesbank will sell gold and buy equities.
People tend to forget that the bull market in gold stocks that followed the gold rally in 1980 began after the rally had peaked, not while it was underway. Where were the intelligent investors then?
Turning paper currency into gold at recent price levels ($270-$290) and taking delivery of the metal has been a very good strategy over the last couple of years, but getting over excited about the current run up in gold prices and investing ones life savings in gold stocks when the fundamentals are so askew is not the best way to play the gold market.
So gold bugs beware, this is a very messy market, built in part it seems on the remembrance of past glories, being aided and abetted by old die hard investors who lost when the previous "new" bull market in gold (or was it the one before?) failed to gather enough momentum. This one could well end the same way.
The Prof can be contacted by email at profvonb2@aol.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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