Wednesday, November 25, 2009

"We Sell Gold" and Other Signs

These past few weeks gold has been setting all-time high after all-time high. It reached $1150 an ounce last week and this week reached over $1190 an ounce. While in the short term gold could correct (and probably will, given how overbought it is), in the long run, we're still nowhere near the end of this bull market.

I'm sure you've seen everywhere the signs that say in big bold letters "WE BUY GOLD" in strip malls and on TV. Is this the top? Not at all. People are still skeptical of gold. After all, how many do you know who own gold? Aside from me and your crazy uncle, probably nobody else. We've left stage one of the bull market but we're still in stage two. This concept of different stages applies to all bull markets. In terms of gold, whereas in stage one only gold miners and crackpots were bullish, in stage two institutional investors, the so-called "smart money," have begun showing their interest. But among the general public, and even among the vast majority of Wall Street, there's still widespread skepticism about gold. It's a "barbarous relic" (which has been used as money for the past six thousand years), "it pays no dividends" (nor do tech stocks), "it takes up a lot of space" (you can fit a million dollars worth of gold in a cereal box, I'm not kidding), and so on.

When will we see the top? When we reach phase three of a bull market, the mania phase. How will we know it's the top? It'll be when your next-door neighbor can't stop talking about the latest killing he made on a junior exploration company in Mongolia. It'll be when cocktail party conversation revolves around grams per ton of mineralization. It'll be when investing in gold will be a "sure thing," just like how buying real estate was such a "sure thing" three years ago. It'll be when, instead of "We Buy Gold" signs everywhere, we'll see "We Sell Gold" signs everywhere. That's when it'll be time to get out before the lemmings fall off the cliff yet again, as they always have. And while everyone despairs at the collapse of the gold market, the sickening realization that that "sure thing" wasn't so sure after all, we'll be on the other side of the trade, shorting the hell out of gold and making money off the folly of others. But that's maybe six or seven years from now. Until then, I'll take my chances on the barbarous relic that's gained every year since 2001 over the "stocks for the long run" that have returned a total of 0% during the past decade.

I hate to make it sound like I'll be a wolf preying on sheep, but that's the truth of it. And though I might make it sound easy, I promise you it won't be easy. At every step along the way, you'll face obstacles. People will think you're crazy. No not just crazy, actually crazy. Your friends will ridicule you as mine have, and even your family will doubt you as mine have. But you must never let go. You cannot let the ephemeral emotions of those around you overrule the sound, logical reasons of why you're doing what you're doing. You must resist the crowd. And in the end, at the top of the bull market, people will praise you, they'll say you were a genius for seeing the light so early.

I've been doing this for many years now, and it's still not easy for me. But one day it'll all be worth it.

But only for one day, because as soon as people start praising my "intelligence" or "foresight," I'll know it's time to start shorting gold. It'll be time to take the unpopular road, to do the opposite of what others are doing, and to be called crazy once again.

The path to riches is lonely.

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