Gold turns cautiously to the upside; Howard Marks on market cycles, investor psychology

(USAGOLD – 2/18/2021) – Gold turned cautiously to the upside this morning after spending the past five days in a downtrend that took it below the $1800 mark. It is up $8 at $1786.50. Silver is down 15¢ at $27.33. Gold is benefiting in early trading from a run of reports yesterday likely to nudge inflation expectations higher and a weaker dollar in overseas trading. I ran into an interesting article yesterday written by Real Investment Advice’s Lance Roberts in which he extensively quotes a 2013 Goldman Sachs interview of Howard Marks. Marks, as many of you know, is the legendary investor and portfolio manager at Oaktree Management. Reading Roberts’ article in full is time well spent, but I was particularly struck with this comment from Marks and thought it worth passing along in the context of what is happening now in financial markets:

“It’s extremely important to know history, but the trouble is that the big events in financial history occur only once every few generations. In the investment environment, memory and the resultant prudence regularly do battle with greed, and greed tends to win out. Prudence is particularly dismissed when risky investments have paid off for a span of years. John Kenneth Galbraith wrote that the outstanding characteristics of financial markets are shortness of memory and ignorance of history. In hot times, the few who do remember the past are dismissed as relics of the old, lacking the ability to imagine the new. But it invariably turns out that there’s nothing new in terms of investor behavior. Mark Twain said that ‘history does not repeat itself, but it does rhyme,’ and what rhymes are the important themes.”

Chart of the Day

chart showing cycle of emotions from optimism to euphoria to despondence and back eventually to optimism again

Chart note: “A speculative frenzy is sweeping Wall Street and world markets,” Bloomberg reported at the end of December. Cedric Ozazman, chief investment officer at Reyl & Cie in Geneva, commented at the time that “sentiment indicators are moving to euphoria.” Things have gotten even more frenetic since, and the euphoria is deepening. Marks quotes Galbraith above. Here is another thought from Galbraith. This one appeared in his book, A Short History of Financial Euphoria: “Fools, as it has long been said, are indeed separated, soon or eventually, from their money. So, alas, are those who, responding to a general mood of optimism, are captured by a sense of their own financial acumen. Thus it has been for centuries; thus in the long future it will also be.”

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