Were we wrong about gold?

Enduring an 18-year bear market in gold

We’re in the airport at Washington on our way to India. As we write, the Dow is down some 300 points and still falling.

Still way too early to know if the bull-market trend of the last five years has run its course. Mr Market may be exhausted from all this running uphill. Or he may be just toying with us. We will wait to see.

What goes around comes around. What’s been going around lately has been fear and loathing of both emerging markets and gold. Since these are our two favourite investments, we are forced to think about what is going on.

When prices go in your direction, you’re asking for trouble. No need to think, you think you know it all already. No need to worry either. Just sit back and let the money come to you. Until it doesn’t. You are much better off when the financial news goes against you. Then, you have to wonder about your premises, your emotions and your sanity.

Hardly a day goes by that we don’t thank our lucky stars. We were blessed, you see, by misfortune. As a child, we had no money. We couldn’t lose the family fortune; we didn’t have one to lose. Which turned out to be a good thing. For if we had had any money, we would have lost it in the ‘Great Bear Market’ in gold of 1980-1998.

Richard Nixon cut the dollar’s connection to gold on 15 August, 1971. We’d read enough history to know what that meant. Soon, we would be pushing wheelbarrows full of $100 bills to the liquor store in order to buy a six-pack. How to protect yourself from the inevitable hyperinflation? Simple: buy gold. That is how we became a gold bug.

Then, the worst possible thing happened. Gold went up. From $41 in 1971, the yellow metal soared to over $800 by 1980. We were right! We were smart! We went ‘all in’ on gold and waited to be rich.

Fortunately, our luck changed before we got very far. Misfortune smiled on us, setting us at odds with an 18-year bear market in gold.


Bill Bonner on markets, economics & the madness of crowds

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Do you know what that is like, dear reader? Every day, every month, every year losing money, mocked by the market gods, dissed by family and neighbours. Every day proved even more emphatically than the day before that we didn’t know what the hell we were doing. Every day, at the sound of the closing bell, Mr Market pronounced his solemn judgment: we were idiots.

For 18 years, we endured this punishment. And thank God, we did. Because now we know how easy it is to be wrong. You try to make out what is going on, but you see only shadows and hear only echoes.

Like a ghost haunting an old house, you will feel a chill breeze brush your face. You will see things appear in strange places and wonder how they got there. But you will never know how this spectral world actually works, not as long as you hold onto your mortal coil.

While we clung to our losing positions in gold, the smart money went into stocks. Perhaps it understood that we were in a huge credit expansion that would take stocks up to 20 times their value in 1971. From 874 in 1971, to 15,400 yesterday. Wow!

But wait. What if you had just stuck with gold?

Let’s see, from $41 to $1,250. Holy smokes. That’s 30 times your money!

Maybe our ‘crackpot’ insight was right all along. And maybe gold and emerging markets will turn out to be decent investments after all.

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5 Responses

  1. 04/02/2014, asbo wrote

    Aren’t you forgetting one important difference? How much income has your Gold paid out in the last 40 years? Add that to stocks and it is a very different picture!!

  2. 05/02/2014, Troillus Krell wrote

    Bill

    Are you saying you got into gold at $800 or at $41?

  3. 05/02/2014, SRG wrote

    Of course if you factor in that the index includes rises do not factor in the Enrons etc and the fees involved in tracking indices.

    Then once again the picture looks rather different

  4. 08/02/2014, Rick wrote

    Nixon did not “cut the dollar’s connection to gold on 15 August, 1971.”. He cut the connection between the One Dollar Federal Reserve Note to gold. The “dollar” is a silver coin containing right at 466 3/19ths grains of silver. It is in the Constitution and cannot be changed without an amendment which has not ever been done. Federal Reserve Notes at the time said “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE AND IS REDEEMABLE IN LAWFUL MONEY AT THE UNITED STATES TREASURY OR AT ANY FEDERAL RESERVE BANK” it also said “THE UNITED STATES OF AMERICA WILL PAY TO THE BEARER ON DEMAND ONE DOLLAR”. It is impossible to redeem a Note for another Note just like the first. Redemption causes the debt, evidenced by the note, to be “paid”.Therefore, the fact is that FEDERAL RESERVE NOTES are NOT United States dollars. Precious metal coins thousands of years old are still valuable while the paper Notes from the past have long turned to dust along with the dishonored promise they bear.

  5. 08/02/2014, Rick wrote

    Correction: The Dollar was scientifically determined By Alexander Hamilton, first Secretary of the Treasury, to be 373.02 grains of silver. He did this by sampling the coins used in commerce at the time and called “dollars”. Copper was added to strengthen the coin or perhaps to try to separate the “dollar” from the silver content.

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