Rodney Johnson | Friday, November 2, 2012 >>
My daughter introduced me to “starring” when she was 10. She came home from school one day and told me she’d “starred” a friend. I asked what that was, and she replied, “You know, a five finger star?”
My confused look led her to demonstrate…
She slapped my leg with her wide open hand, leaving a red mark in the shape of a handprint. The kids call that a star.
Then she laughed uncontrollably.
That’ll teach me to ask too many questions…
I tell you this story now because I think gold investors must feel like they just got starred, and they didn’t see it coming.
The global markets were feeling pretty good going into the fourth quarter, with U.S. equities marching toward their all-time highs.
The euro zone bankers had just promised to do “whatever it takes” to stabilize their bond markets, and then had introduced the Outright Monetary Transaction (OMT) program, which is not – I repeat NOT – a life support system for failing countries. But if it walks like a duck and quacks like a duck…
At the same time the Federal Reserve announced it had failed miserably. Unemployment is not budging. The economy isn’t healing. Savers are getting crushed and the working poor are getting poorer. So the Fed decided to double down and outlined a program to create new money out of thin air to the tune of $40 billion a month… forever.
Based on these programs, risk assets were all the rage, for a while. Gold was in the group, as it soared up near $1,800.
Then reality crept in.
People noticed that while the ECB might talk a big game about unlimited new euros funneled to the Club Med of the euro zone, the dour Germans haven’t exactly agreed. And the Greeks still don’t pay taxes. The Spanish in Catalonia are still voting to secede. Things are still a mess.
In the U.S., earnings season is dismal. Earnings are going down, not up. FedEx and UPS, which are bellwethers, are ringing the alarm, not the all clear. Suddenly it is as if everyone figured out that the Fed can print with abandon. It might cause long-term damage (which we think is inevitable down the road), but in the short-term it really can mean, and really has meant, nothing.
So risk assets sold off… including gold.
This Isn’t the End… This Is the Warm Up.
The view of risky assets changes on a dime these days (or rather, on the printing of billions of a currency). There are other forces at work. Like taxes. Like government spending. Like corporate earnings.
Printing won’t fix economic ills.
Investors are asking “So what?” a lot faster now.
Soon we will be staring down 2013, peering over the fiscal cliff. We don’t think all the taxes will go to dizzying heights, but they don’t have to. It is enough to know that some tax hikes are coming. It’s enough to know that some spending cuts will happen, all while earnings are dampened and markets are concerned… all of which will drive risk assets down again.
And gold investments will go with them.
This is why we keep reminding people that they should not be married to their investments, including their gold investments.
Yes, many people keep some gold as a hedge against calamity. That’s fine.
But what about GLD? What about SLV?
These are investments to be bought when opportunity arises and sold when there is danger. You should be hearing the warning bells by now.
Don’t get starred.
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