The Gold Market Of 2011 to 2013: How To Survive The Years Of Misery

You might as well call 2011 to 2013 the misery years for gold investors.

Between September 2011’s gold price high of over $1,900/ounce, to today’s spot gold price of $1,310/ounce, the yellow metal has fallen over 30%. Not only has the price fallen, but the last two years has seen the market lose its clear bullish trend in a sequence of range-trading and chops down. This has been quite a different time to buy gold than the preceding years.

Even though the gold investment market had got too hot and speculative in the run up to the summer of 2011, with 40% price rises in a few months, the experience since then has been extremely challenging for gold bugs.

Sentiment in the market has reached apocalyptic lows and all the while gold bugs have been victim to accusations of falling in love with their investment positions, flat-earth mentalities and generally holding a useless asset whose day is done.

Experiencing some doubt about your world view and appreciation of gold during such a correction is only natural. It will have been an even more doubt fuelled existence for those who bought gold in the heady summer of 2011 and are sitting on unrealised losses.

This is the most pressure on gold investors’ positions and mentalities in over a decade.

It’s been a tough, emotionally scarring and counter-intuitive ride.

But how can gold bugs deal with this nightmare?

Re-thinking your gold investment position

During times like these your investment thesis is challenged more than ever.

But, so it should be.

Falling in love with an investment position is a expensive error to make and investors have to appreciate that every asset class has its time in the sun. Bull markets and bear markets ebb and flow in mysterious rhythms that we’ll likely never fully understand.

We also have to remind ourselves that retail investors all too often exhibit tendencies of selling winners too early and holding onto losers too long, in the hope/conviction that they’ll come good eventually.

So us gold bugs have been swallowing some pride, moderating our swagger after 11 years of gold price rises, quieting our taunting of gold bears and pausing for some deep reflection.

Most gold bugs’ heads will have been spinning with questions such as the below:

Is the gold bull market truly over?

Is the case for gold busted now?

Have central bankers solved the GFC with their turbo-charged printing presses?

Are deficits and debt loads shrinking?

Is the demand to buy gold, real physical gold, diminishing?

Was our logic and rationing simply flawed?

You’ve probably had your own questions to. Either way, the burden of proof has shifted to us gold bugs to justify our positions and any on-going gold buying.

Properly handling the noisy gold bug sledging

Sledging is a British term used for verbal tactics deployed in the game of cricket to affect the psychology and mind-set of your opponent. Elite performers in this sporting field need to learn to mute out this background noise and concentrate on the task of winning the match.

Investors face the same noisy distractions from talking heads in the mainstream media, would be experts and other market participants with contrary and opposing views.

Your job as an investor is to filter this background noise in as balanced a way as possible to ensure that your world view is healthily evolving, adapting and improving, and as a result your portfolio is positioned as well as it might be.

Investors’ and sportsmen’s performance can fall foul to bad psychology, sometimes induced by sledging.

During our gold bug reflections there have been plenty of loud voices and distractions to deal with, weigh up and consider. The gold bug sledging has been strong and the intensity of it will have been a new thing for many in this market to deal with.

Academics like Nouriel Roubini have enjoyed their moment in the sun to mock gold bugs, confidently predicting continued price falls and a painful bear market. Roubini is not well received in the gold market, but he has made some significant macro calls previously, so he cannot be dismissed as meritless. Then again, Roubini doesn’t have the greatest record on our particular golden asset class.

Professors like Paul Krugman have also been broadcasting anti-gold messages from their lofty media platforms, along with other prominent market based gold bears.

The financial media, having to report on any market movement whatsoever as worthy of news, has been in overdrive with comment, editorial and survey pieces on whether the gold bull is dead, who slew it and what a newly uncertain and precarious future holds for gold investors. In fairness to them, a 30% fall in the only recent decade long bull market is indeed a talking point and talk about it they have.

Like sportsmen in a poor run of form, investors holding a recently unpopular asset (especially one as divisive as gold bullion) come under real pressure.

I’ve felt the pressure and I would expect every one reading this piece has too. Anyone in the mining shares will have experienced this even more acutely too.

This has been and still is a most challenging time for gold investors to keep their heads, remain coolly logical and make smart decisions.

Emerging from deep gold bug reflections

Nonetheless, even with the psychological scarring of this correction causing gold bug jitters and nerves, when you calmly appraise today’s economy and financial world, most gold bugs still emerge with their same investment thesis when it comes to buying gold.

The spot gold price might have fallen, but what else has changed in the world or even the gold market?

The developed, industrial world still runs eye-watering deficits. You don’t need to be called Reinhart or Rogoff to see debt loads clogging our economic motors, with interest payments accounting for a larger and larger percentage of our production. With welfarism draining the productive class, these phenomena don’t show any sign of abating soon.

You also don’t need to be an expert in monetary economics to see that a truly epic global currency war is still raging. The Fed might talk about tapering and slowing or ceasing its asset purchases, but if they want a weak dollar and the exports that come with it to help keep fuelling ‘the recovery’, they will need every other central bank to nicely follow their tapering lead for the Americans not to experience an export divorce in this currency war.

Within the gold market itself, whilst some Western speculators might have been changing their stance on gold a different breed of investor in Asia is still actively buying every ounce of physical gold they can. This dichotomy in the gold market has been commented on by our very own Jan Skoyles in her research as well as by the World Gold Council. Alongside the gold bug sledging, you will have also had to get your mind round the whole paper gold versus physical gold debate.

We also note that a gold market representing only 1% of global financial assets is not exactly dying of over-participation and all the (hot) money possible having entered the game. Gold has represented a far higher figure of financial assets during previous bull markets – I’ve seen estimates in 1980 ranging from 15% to 28%. Exhaustion has not been the death of this bull market yet.

As a final aside, at times like these we gold investors we should also to remind ourselves of the difference between price and value. Does a 30% fall in the gold price mean that gold has lost a third of its value in 6 months?

We would suggest this is not the case for a unique financial asset that is free from counterparty and credit risk amongst a still highly leveraged financial system.

Gold might have risen over 6 times since 2000, but if the proliferation of global financial assets has shown growth of the same or more, then gold must be equally valuable as it was when trading at $250/ounce. Some might say that given the increase in the money supply gold represents even better value than it did in 2000.

Striding forth with a recalibrated golden compass

After going through this reflection process I imagine most gold bugs have maintained their faith in this most precious of investment theses, even if their perspectives have temporarily shifted and they are sporting a few battle scars.

You might not be talking so loudly about your gold investing. Or then again, maybe, like good old Peter Grandich, you are.

You might not be feeling like a future currency collapse is as close to hand as previously felt.

You also might be glad you didn’t use leverage to achieve your gold position.

You might feel like the aforementioned sportsmen in a trough of bad form, grinding his way through it but still with continuing love for his game.

If you’re like us, you’re still holding gold for sound and measured reasons. The more experienced or convicted might still be buying gold, or even buying more aggressively. It’s encouraging to see investors like David Einhorn and George Soros rebalancing the gold focused parts of their portfolios towards even more aggressive positions, by reducing exposure to bullion but increasing it to mining shares and junior mining shares.

The gold price action of the last two years (we call it a correction) is a real learning experience for less experienced gold investors, and especially so for the more recently arrived gold bulls.

They are crucial learnings nonetheless and bull markets don’t just go up constantly for year after year. No doubt you’ve heard the comparisons made to the 1970s where during a decade long secular bull market there was a 50% correction prior to eightfold price increases.

It’s been painful being a gold bug recently. It might be so for a while longer.

But, ensure you keep thinking rationally about gold investment. Keep control of your emotions and don’t let sledging put you off your game.