Valuing the invaluable

More signs suggest that gold has reached a turning point. But putting a fair value on the yellow metal is harder than assessing what a business is worth.

By Bill_Fleckenstein Aug 16, 2013 2:12PM

Gold Bars © Photodisc/SuperStockLast week, I received a question from a member of my subscription site who wanted to know about recent action in gold and the miners (which have been showing signs of life), and whether higher prices would give me more confidence that we had seen the lows.


In trying to craft an intelligent and useful answer, I spent a lot of time thinking about the gold market and related ideas I hadn't really discussed in the past.


What follows is my response, which I hope illuminates why it is so difficult to be truly emphatic about the price of gold -- as opposed to the value of a business.


Accounts conceivable 

I feel strongly that June 30 was most likely the low for gold and the miners. But the problem with gold is that it is just a price. It isn't like a business, where you can track such things as balance sheet items, sales, margins, channel activity, competitors and suppliers to get a very strong feeling that something important has changed or that the time to act in a big way is now -- long or short.


About the closest thing we have to a timely, nearly unequivocal fundamental fact is that gold has been in backwardation for 30 business days. This should never happen -- and has happened only rarely, briefly in 1999 and 2008 -- because it should just get arbitraged away.


The fact that the market hasn't reverted to contango suggests there isn't enough metal around in New York or London (at current prices) to allow that to happen. A potential conclusion is that there is such huge demand versus supply at current prices that the price should not be able to go lower (and stay there).


If that's true, it would argue in favor of the idea that the lows in June were "it" and that this tightness, combined with the short position and prior liquidation, means that prices are poised to rocket higher at some point soon.


A store of guesswork 

The problem is that no one knows for sure. I have talked to several people who are close to the metals trading industry (whom I have known for a long time), and they agree with my analysis. But there could be other technical explanations -- mostly having to do with the fact that interest rates are near zero -- that could mean my thesis is wrong.


We will only know for sure as time goes by and new developments occur. All of the above is also why so many people who have opinions about gold base them solely, and often erroneously, on the chart patterns.


As for the miners, it is even harder to be certain about them, because their whole business revolves around the hard-to-determine future gold price.


The bottom line is it takes melding together lots of clues and charts, as well as fundamental guesswork, to be able to have a correct opinion about the gold price. Obviously, being right about the overall trend, bull market or bear market, is a huge help. I did that pretty well in the bull market but totally missed the shift to the bear market.


I can't believe it, but it took me well over a year to consider the possibility that gold had slipped into a bear market. In any case, I think we are now in the process of restarting the bull market, but I don't know for sure and can't know. Until it is a bull market, it will still be a bear market, with the attendant dangers and different risk management (technique) requirements.


It's who you know 

In the investment business we all have periods when we are hot and when we are cold. On that subject, one has to realize in one's own investing there are periods where most everything you think and do is correct, and when that is the case it is possible to be more aggressive.


While it is easy to make money when it seems as though you are getting The Wall Street Journal a week early, the bigger trick is not to get killed when it seems you can do nothing right. When that inevitably happens, you must spend more time sitting on your hands while waiting for your view of how the world should work to coincide with that of the masses, aka the market.


In his most recent Gloom Boom & Doom report, Marc Faber discusses his experience at the tail end of the tech bubble and makes an important and related point. He writes: "I had heavily shorted high-tech stocks in 1998 and subsequently I lost a ton of money. This episode is really a dark spot in my life as an investor and investment advisor. It taught me several lessons that I shall never forget. What I think about markets is completely irrelevant. What matters is what other people think about them. Fundamentally, I was right about the coming collapse of the Nasdaq; however, for as long as the majority of other investors believed in the 'New Economy' theme, high-tech and communication stocks continued to appreciate."

Those of us who understood that the dot-com boom was a bubble were all tortured until the bubble burst. That often happens in markets, where you are exactly right about what you think will happen, but the market doesn't agree with you right away, and until it does you have to manage your positions carefully.

It should be worth the weight 

To state the obvious, when the bull market in gold resumes, it will be easier to make money being long, though it will still be tricky. Unfortunately, trading and investing in gold is more difficult than just investing in the stock market. It is more like managing a short position.


I wish that wasn't the case, but it is. I also wish the Federal Reserve wasn't so incompetent, so we could just buy stocks or bonds and didn't have to focus on the variables we do. But we must play the hand we are dealt, and we have been dealt one with central banks pursuing insane policies that force us to deal with a warped economic/financial world where the money is "no good."

I hope this discussion helps readers understand the gold market better and, more importantly, is useful when it comes to managing positions.

Aug 16, 2013 5:14PM
“The main tools of modern finance are mystification, obfuscation and hypnosis. What is different now is that all the governments have already shot all of their magic bailout bullets. The guilty parties are still at large, richer than they were before this crisis and probably thinking that the next crisis will make them even richer.” – Dimitri Orlov

"Hard currency" has no counter-party. It has "earthly", and thus constrained and sustainable limits -unlike politician's "promises". Who do you think the "counter-party" is for any fiat  "currency"? It is politicians and the governments that they conjure. History has proven how well every-single-fiat currency- has fared. The fatality rate is 100%. Gold and Silver (as well as many other precious earthly commodities) have had duration as a store of value for... well, ever since recorded history.

Why are these simple facts - for so very many people - so hard to grasp?
Aug 17, 2013 9:50AM
Here's the problem and it was highlighted during the Dot-Com Boom just before the Bust. Markets are heavily manipulated by folks that have less creditability than the Devil trying to get you into Heaven. Folks in finance will say and do anything to PUMP their Current Position. To add insult to injury, there's very little Real Regulations that are enforced. We are seeing the problems, after the FACT.

Those dissing Bill have a right to do so but he's one of the Few Folks that not full of constant BS. In fact, he has discussed many important issues surrounding the financial markets. We should be thankful for his in depth reflections. You certain will be hard pressed to find it elsewhere for FREE.

I don't use anyone's else advice but my own to Buy or Sell. Nor do I think anyone else should so if you do and lose, that becomes a You Problem. It's your responsibility to research and determine what you buy and sell, not Bill's and or anonymous posters. You don't have to be right on the overall direction of the Financial Markets to pick winners. That has never been true. I find Bill's insight to be invaluable. I just pick my own trades, regardless of who's posting or writing an article.

Aug 17, 2013 1:02PM

Fleck your the most honest/humble financial blogger on MSN. Your thesis is valid but the fed keeping federal funds rates at zero and QE to control the open bond market we are in uncharted territory now. I personally think that central banks will work overtime in anyway to keep metals contained and paper going. But at some point gold and silver will breakout to new highs because fundamentals always win out in the end.

Aug 17, 2013 9:24AM

Are the central banks holding Gold ? according to some of you only fools take a position in Gold. I guess civilianization has had it wrong for 5,000 years ? Think about it !!!

Aug 17, 2013 11:01AM
The allure of Gold will always be there for a certain segment of the population, But don't forget the largest and growing Majority of people.That New Majority ,...India.China,  Brazil  All South America,Mexico,ARAB countries and  that same majority of people on the streets of the USA, LA ,NY.They Love Gold.And the New Majority is growing like crazy and they  want more,more,more,more.Yes,it is a trade a form of barter it will always hold its value  and lastly,   what is kept in the most highly protected and secure depositories on the planet ..Fort Knox  and The NYC gold depositories....GOLD  .... 
Aug 17, 2013 12:55AM
Gold is and always will be antidote to the greed, manipulation and ultimate stupidity of those in control,
Aug 17, 2013 6:30PM
I think since we are experiencing an artificial market and rates are as low as they can go and waiting to descend into a global meltdown, it is anybody's guess as to what will happen exactly, and to what the value of anything will be in the near future. This whole thing is going to end badly that is the only thing I am sure of.  I think if anything will hold any kind of monetary value as the currencies slowly die it will be gold.  But a can of beans may be just as valuable!
Aug 16, 2013 7:13PM
Just buy the Gold or Silver because they are gonna be the only real cash with value in this world thats  accepted worldwide! Everybody loves metals nobody loves Dollars anymore!! Get ready for an explosion!! The markets gonna crash and it might not ever come back this time! Watch those rich speculators that have been robbing the 401 k`s sell and buy metals because there is nowhere else to turn. Get Gold while its this low because you wont get it this cheap again for a long long time!!!
Aug 19, 2013 9:57AM

The stock market is (arguably) up b/c investors felt they had nowhere else to go. When the fiat-money house of cards tumbles, gold and silver will go up for the same reason.


One thing I like about Bill is the way he explains his train of thought. Whether you agree with him or not, you have to apprecaite his style.

Aug 18, 2013 12:05PM
Bill the best point you make ...... 'what other people think investments are valued'.......Gold is valued in China and India, there are 2 billion people there and their governments are buying gold consistently.   What to watch for gold prices when it goes up, and who is buying!  Gold is being bought again in markets.  Why they buy, different reasons and objectives?
Aug 19, 2013 2:02PM
As much as I dislike the monetary manipulation that the Fed has been doing, the Dollar as the reserve currency is "too big to fail" and the world as a whole won't let it happen - and they won't let gold or silver ever come back as a monetary standard. National debts are too high and nations like to spend into more debt. Japan's debt is twice on a comparative basis than the US. Have they collapsed and started using gold? No. So what will it take? As of now - no one knows.  
Aug 19, 2013 12:32PM
Gold to below $1100 by end of September. :)  rates spiking higher.  Larry Summers will decimate gold A La Volcker starting in Jan 2014. Bye Bye!
Aug 18, 2013 12:08AM
At this point you're better off buying certain gold mining stocks than gold, as they have been severely beaten down.  My favorites are Semafo, Allied Nevada, Rio Alto, and Teranga Gold, but I also like Iamgold.
Aug 19, 2013 1:31AM
If you real Jim Roger's "Hot Commodity", he explains all commodity price movements by physical supply and demand. However, as I observed the April 12 crash and subsequent 'correction', gold price was manipulated by big financial firms in London and New York. The paper market is used by these firms for financial gain. I used to believe gold is currency. Now I think it is just one commodity that is being manipulated by the financial firms.

There is not enough gold or silver for everyone to hold physically and use for currency.   There never was and never will be.  There is just too many people on earth.   Gold's value is indeed in the mind of the masses and today it is just coming up from the bottom where many still have to hold onto it until, hopefully, it comes back to where it was when it was purchased a year or more ago.  


Gold is out there; yet there isn't much to make a market with due to too many holding it and waiting.....   and by being held it still doesn't come up in price quick enough like most want it to.   That means the masses are not willing to pay to own it.   They may still be reeling from the freefall it had this past year and don't trust it enough to own it.


The preppers think the value of an object is in its ability to be consumed, not in its rarity.   If needed, and although I do have a small position in a gold fund, I'd trade goods for cartridges or food before I'd trade for gold.  If you really want to buy something that will become rare, buy clean water.

Aug 19, 2013 7:39PM

"Mystification obfuscation and hypnosis may be the tools of modern finance", the same can be said for gold and silver being valuable as "hard currency".  They, gold and silver, are no different than diamonds, their value being totally dependent on peoples thinking they are valuable, if and, once that belief is no longer commonly held the value of these metals will become less than the value of currency based on the strength and creditability of the issuing country. 

Aug 19, 2013 6:24PM
Bill, the problem with gold is GLD has become a non growth no dividend paying equity that was crushed when Paulson and other gold bugs started dumping their positions. There are also to many snake oil salesmen pimping the commodity. There is no true "fair" price and it will more than likely rise and fall with the "fear factor"...
Aug 19, 2013 11:27AM
the trade deficit is getting smaller due to US oil longterm dollar should be stronger -assuming gov't get their act to control deficit but it will take a crisis before they act.
Aug 18, 2013 11:17PM
Gold's value is a function of supply and demand, no different than any other commodity.  What is different about gold is the factors that influence its supply and demand.  These factors are far more complicated than for most commodities. On the Demand side, in addition to the typical commodity driven demand for gold (jewelry, commemorative coins, etc.) there is also a perceived stored value demand (investors, doomsday preparers) and an actual stored value demand (central banks).  These three demands interact with each other and are intensified by market speculation and the existence of gold ETF funds.  Supply is also influenced by the unique fact that there is a fixed total amount of recoverable gold beyond which no price can increase supply and the fact that as supply dwindles gold has historically cost more to recover (produce).  It is just not possible to draw a meaningful supply/demand curve for gold.  We are all guessing.
Aug 22, 2013 12:50PM

In order to get to "what other people think" about the gold market, you must dismiss most of the written words since those are dominated by the Gold Bug "religion" now. But if there are a large amount of constant shorts (or shorting via futures), this represents the gold market "what other people think" BY DEFINITION and cannot be ignored. This is the problem with dismissing reality for the sake of a religious tenet (i.e. "Gold only goes up--if it goes down it must be manipulation"). Conversely, if gold is going up constantly that also represents "what other people think". Therefore, I think with gold the only sensible methodology is trend-following, given the situation as it is--just as you have said.

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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website,, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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