Gyroscopic Investing

No way gold will get higher than $1800 

Of course I have no idea, so I remain 25% in gold 

How many "no way gold will pass $x" threads have we all read on other internet forums over the last several years?

I believe that this is an example of the heuristic known as "anchoring." 

Since gold is a little below $1,800, and already seems to be very high by historical standards, the anchor point of $1,800 seems convenient, since it is just a bit higher than what we already believe to be an astronomically high number.  Surpassing this number seems like an impossible task, in part because it's never been done before; thus, $1,800 seems like a safe ceiling.

Of course, we all know that there have been many previous anchor points with similarly compelling rationales based upon previous price records.  Still, though, anchoring can have a powerful effect on perceptions of future events.

What is interesting about the way people tend to react to rising asset prices is that they are skeptical through the early stages of the price rise.  As the prices continue rising, however, this skepticism begins to break down, little by little, until it finally begins to feel safe to ease into the asset in question.  As masses of people work through these emotions it makes sense that new demand continually enters the market in the form of newly won-over skeptics.  When the asset's continued price appreciation becomes the conventional wisdom, suddenly the market finds that there are fewer new buyers entering the market--after all, the skeptics have all been won over. 

As the process above begins to run out of steam, one sees a parabolic rise turn into a collapse of the asset in question, and there is a similar psychological process on the way down as people are gradually re-trained to be skeptical, but this re-training takes time, and that's why falling asset markets can take a while to completely bottom out.

Where are we at with the gold market?  Well, all around me I see people who don't own any gold and constantly talk about how they aren't buying any because it's too expensive...but then it gets more expensive.  At some point many of these people will break down and start buying gold.  When gold ownership begins to seem like an easy and obvious decision for all investors, that will probably mean that we are near the top.  Right now, though, it seems like VERY few investors own ANY gold at all, which means there is enormous pent up demand as the skepticism described above is slowly chipped away.

Ask one of your friends, business associates, family members, etc.: "Do you own any stocks or stock mutual funds?"  They will normally say yes.  Then ask them if they own any gold.  Most of these same people right now will say no.  When these people begin to say yes, the top of the market may be near.

$4,500 an ounce gold doesn't seem crazy to me.  A move like that would be consistent with the size of the move from bottom to top in the 1970s ($35 to $800, or about 22 times).  If we figure a starting point of about $200 an ounce in the late 1990s, a 22-times appreciation gets us to $4,500 or so. 

After a $4,500 blow off top, perhaps we will see gold fall back to $2,500 to $3,000 and then trade in the $2,000-$3,500 range for many years as stocks again become the asset of choice.

Just speculation, of course.

Sounds good to me too MediumTex. No top in gold but a lot of fear driving this market. All I know for sure is what the price is today. I buy real gold and silver on dips...

MediumTex wrote: Ask one of your friends, business associates, family members, etc.: "Do you own any stocks or stock mutual funds?"  They will normally say yes.  Then ask them if they own any gold.  Most of these same people right now will say no.  When these people begin to say yes, the top of the market may be near.

Do you think this was the case in 1981? 

Adam, it has probably been linked to already but there is something about that in:
http://www.321gold.com/editorials/holme ... 40511.html

It says that gold represented about three times as large a portion of financial assets then as it does now.

Adam1226 wrote:

MediumTex wrote: Ask one of your friends, business associates, family members, etc.: "Do you own any stocks or stock mutual funds?"  They will normally say yes.  Then ask them if they own any gold.  Most of these same people right now will say no.  When these people begin to say yes, the top of the market may be near.

Do you think this was the case in 1981? 

No.  I think fewer individuals were participating in all markets back then.

If you look back at the gold mania as the 1970s gold market wound down, however, I've read about gold conferences where people had religious-like conversions where they finally "got it" about how the U.S. dollar really was doomed and its crash was just a matter of time.  Gold peaked shortly after that.

MediumTex wrote: I've read about gold conferences where people had religious-like conversions where they finally "got it" about how the U.S. dollar really was doomed and its crash was just a matter of time.  Gold peaked shortly after that.

Don't we have that now? 

Adam1226 wrote:

MediumTex wrote: I've read about gold conferences where people had religious-like conversions where they finally "got it" about how the U.S. dollar really was doomed and its crash was just a matter of time.  Gold peaked shortly after that.

Don't we have that now? 

That was my point.  I don't see that many people right now who own gold.  Everyone I ask says they don't own any.

People seem to still be in the process of breaking up with their crazy girlfriend (i.e., the stock market).  Their new honey will likely be gold, but we are IMHO not anywhere near that yet.

When the stock market tanked the other day, one of my frazzled coworkers asked me how I invest my money. I calmly told him about the PP, and that 25% of my assets are in gold bullion.

His response: "25% in GOLD??! <nervous laughter>"

As long as I continue to get reactions like that from most people, and as long as global financial uncertainty continues to burden us, I can't see gold's long-term trend being anything other than up.

Tortoise wrote: When the stock market tanked the other day, one of my frazzled coworkers asked me how I invest my money. I calmly told him about the PP, and that 25% of my assets are in gold bullion.

His response: "25% in GOLD??! <nervous laughter>"

As long as I continue to get reactions like that from most people, and as long as global financial uncertainty continues to burden us, I can't see gold's long-term trend being anything other than up.

When that guy says: "ONLY 25%, huh?", it may be time to worry about gold.

I think what Adam is saying is that while we don't have mass gold ownership now... we didn't in 1981 either.

What we have now, like 1981, is a small number of people screaming at the top of their lungs that the dollar is going to collapse, more and more people "getting it," but most of the rest of the population feeling like they're "late to the party" to a shiny yellow metal.

How different is our situation today from 1981??

Stone's point about the 1/3 financial asset representation of gold today vs then is interesting, but as far as mass-acceptance, I don't know.

moda0306 wrote: I think what Adam is saying is that while we don't have mass gold ownership now... we didn't in 1981 either.

What we have now, like 1981, is a small number of people screaming at the top of their lungs that the dollar is going to collapse, more and more people "getting it," but most of the rest of the population feeling like they're "late to the party" to a shiny yellow metal.

How different is our situation today from 1981??

Stone's point about the 1/3 financial asset representation of gold today vs then is interesting, but as far as mass-acceptance, I don't know.

Thanks for clarifying...that was what I was trying to say (clumsily maybe).

I mean I just don't know... I suppose one could compare the right-wing talk show ads and gold vending machines to certain aspects of 1981.  Further, while we do have negative real interest rates (gold helper #1), we hardly have a wide-spread (other than commodities) inflationary cycle generating (gold helper #2).

Even backing up a bit, gold being the most volatile asset of the PP, and less likely, in general, to provide stock-like long-term returns, I really wouldn't blame someone for paring it back a bit.

That said, I agree that I wouldn't be surprised to see gold go to $3k...

I have no idea how high it can go, but this latest move has me spooked, so I have rebalanced down a little bit. Not back to 25% again, but now I'm around 28%. This gold move reminds me a bit of the silver mania a few months back that crashed hard. The only difference is that there isn't any good news on the horizon to stop the climb.

I am officially the contrarian indicator after my treasury bonds doomsday speech, so MT you might want to go buy some gold calls.  ;D

doodle wrote: I have no idea how high it can go, but this latest move has me spooked, so I have rebalanced down a little bit. Not back to 25% again, but now I'm around 28%. This gold move reminds me a bit of the silver mania a few months back that crashed hard. The only difference is that there isn't any good news on the horizon to stop the climb.

I am officially the contrarian indicator after my treasury bonds doomsday speech, so MT you might want to go buy some gold calls.  ;D

doodle,

Are you doing a traditionl HB PP, or is it one of these custom jobs?

doodle,

I'm not trying by any means to say "told ya so," but what are your thoughts on recent LTT performance??

If you are still as certain in the long-term about your predictions, why would you ever want to be selling gold before a normal band you've set up?

We'll, like an idiot I sold out of 30 year bonds when the yield got below 4% and moved into a five year treasury ladder. Little did I know that we were going to spiral into the great depression part 2 a week later.

I also overweighted the metals a few months back so thank goodness that has made up a little for my idiot bond move.  I am getting queazy about this latest parabolic gold move so I am rebalancing like a good boy. Gold has gone vertical like silver did a few months ago. GTU had almost a 7% move today. That is scary.

What's your take MT?

doodle wrote: What's your take MT?

If I may be so bold...

MT's take is that you should own 25% stocks, 25% bonds, 25% cash and 25% gold.  He also probably thinks that you should rebalance within the 15-35% bands without trying to time big moves.

Moda,

I'm still holding out for a longer term "I told ya". Nevertheless, I am missing the rebalance that could have come from LTT's. I can't bring myself to buy bonds at this level and potentially get burned on a reversal, so I am just going to hang onto this five year treasury ladder for awhile.

I'm holding a tighter rebalance 20% and 30%, because I don't feel comfortable with 15% or 35% in any one asset with this insane volatility. I was holding about 35% of metals due to my doomsday sentiments a few months ago so I was luckily able to rebalance that down slightly and make up for my bozo bond move.

I think this is what you call "learning the hard way".

Adam,

I was actually referring to the gold move of late. Today was an extreme upside move in GTU of nearly 7%. I would hate to be a percent or two from the 35% rebalance move and ride gold down to the 200 day moving average again, without taking a little profit if this move were to quickly reverse.

I got to about 31% in stocks at the top of the market and didn't rebalance. I have held it all the way down. Kind of annoying in retrospect.

doodle wrote: I can't bring myself to buy bonds at this level and potentially get burned on a reversal.

How will you get burned on a reversal?

doodle wrote: Adam,

I was actually referring to the gold move of late. Today was an extreme upside move in GTU of nearly 7%. I would hate to be a percent or two from the 35% rebalance move and ride gold down to the 200 day moving average again, without taking a little profit if this move were to quickly reverse.

I got to about 31% in stocks at the top of the market and didn't rebalance. I have held it all the way down. Kind of annoying in retrospect.

Sorry to misinterpret, Doodle.  Wasn't trying to be smug.  Just thought it would be an adventure to try to speak for MT. 

Adam1226 wrote:

doodle wrote: What's your take MT?

If I may be so bold...

MT's take is that you should own 25% stocks, 25% bonds, 25% cash and 25% gold.  He also probably thinks that you should rebalance within the 15-35% bands without trying to time big moves.

Yep.

doodle is very insistent on learning everything the hard way.

With any luck, though, he will learn sooner rather than later.  Life is a lot more enjoyable when reality is not whipsawing you on a daily basis.

The markets are like going into a mosh pit with a bunch of pickpockets.  It's not a friendly or forgiving environment.  The PP offers a rare opportunity to participate in the markets without taking on a lot of risk.  When one begins to see this feature of the PP, that's when the pieces start falling into place.

Doodle,

You just might get the long-term I tolda ya so, so I'm in no position to rub anything in... Crazy times indeed, and with most of your money in retirement accounts (assuming here), I think 20/30 rebalance bands are a good idea if they make you feel better.

I recently moved a big chunk of my dad's non-PP stuff (in high-expense managed stock funds from his old Wells Fargo lady) into a 40/40/20 (stocks/bonds/gold) PP, and I couldn't have timed it better, and he couldn't be happier, so I'm in this cocky mood right now and just nervous what will happen next.  Gold's move makes me nervous, as does everything the maliable yellow metal does tends to do.

I think any of us who were able to "spread the word" successfully all deserve a pat on the back... it ain't no easy task.

This morning, our local morning news did a segment about how people are now looking to gold as an investment, since it's approaching 1800.  But the curious thing about the segment was that-- instead of portraying people buying gold-- it profiled a blue-haired grandma trading in a gold necklace for $1100.

Strange, eh?