The gold panic of 2013

The store of value that Wall Street loves to hate shows off its volatile side. But those who understand the economy and the world understand this is not the time to panic.

By Bill_Fleckenstein Apr 19, 2013 7:04PM

 Gold Bars © Photodisc/SuperStockI was out of the country last week and thus did not post a column, but readers are no doubt aware that the gold market tanked about 14% between Friday, April 12, and Monday, April 15. So I will be devoting this week's column to that subject.

 

The first big question to consider is, Does this slide have predictive value? Does it tell us anything about the future?

 

I don't believe it does.

 

The 1987 stock market crash (which was similar to the Friday-Monday panic selling) certainly had none. It was about poor fundamentals and people not adjusting to them because of portfolio insurance, which detonated like a bomb. Yet the market break didn't "tell" us anything.

 

The gold market itself has experienced similar declines in the past, which have predicted nothing. in 1976, gold dropped from a high of $198 to $105 an ounce, a decline of about 40%. Interestingly enough, the last three days of that decline saw the market drop about 12% (similar to the amount lost during trading on Friday and Monday).

 

However, that collapse was a giant head-fake. Within about a year gold was back to its previous high (that would be $1,900 in today's environment), and over the course of the next four years it traded up over eightfold from those lows, even as our Federal Reserve (under Paul Volcker) was trying to do the right thing in the end. (And when it was pursuing the wrong policies, prior to Volcker's appointment, that was kid stuff compared with what the Fed and the rest of the world's central banks are doing today.)

 

What we just witnessed in the gold market, in my opinion, was a panic liquidation that has no predictive value and which occurred in the teeth of the most wildly gold-friendly fundamentals the world has ever seen. Unfortunately, this is a lesson of markets sometimes being perverse and doing whatever they want to.

 

'I must be crazy to be in a loony bin like this'

The second topic to consider is investor psychology. Obviously, psychology plays a huge role in markets, and it seems quite clear to me that a vast majority of the American investing public believes that it is 2007 again.

 

I say that because virtually all the people who missed the housing bubble are now sanguine about the real estate market, the stock market and the economy. In fact, it seems as if many are downright giddy. It is as if 2008 never occurred (or 2001-2003, either).

 

For some reason, this Pollyanna/Goldilocks crowd is incapable of seeing the obvious, in that they are in total denial regarding the negative effects of central bank policies. They cheer money-printing, as it takes stock prices higher and boosts the economy ever so slightly, but they refuse to worry about its consequences, not the least of which is inflation.

 

By extension, they also have complete faith in the very institution that has wrecked the economy and financial system: the Fed.

 

 How people can rationalize the inflation we are experiencing is beyond me, but that is where we are. That will change, but it is not possible to know when.

 

I believe this clueless bullish glow about everything being OK is one of the reasons there is so much hatred for gold. Back in 2007, none of these out-of-touch Goldilocks types really cared about gold. Back then, the price was, say, $600 an ounce after rallying from a low of $275 in 2001, but nobody really paid attention. In essence, they couldn't even spell "gold."

 

'That's right, Mr. Martini, there is an Easter bunny'

Now, however, gold has traded as high as $1,900 and generated a lot of news, such that the Pollyanna/establishment people have come to view it as a threat to their worldview. In other words, if gold is rallying, perhaps something might actually be wrong (although I'm not sure they even think that), but what they believe for sure is that a decline in gold prices means their view that "all is right with the world" is correct.

 

Thus, they have a vested interest in rooting gold lower.

 

That is why there is such massive hatred of it and there are so many negative articles in every mainstream publication (and why Wall Street especially hates gold).

 

Meanwhile, the people who can see through all the hype and nonsense and who own gold are in the minority, especially in the U.S. In other parts of the world, such as Asia -- where there are physical and central bank buyers -- people do not succumb to the same delusions. In the end, the physical market will win out, but in the short run, the paper market has so much more volume and is so large that it is the tail that wags the dog.

 

The Goldilocks crowd will soon realize, once again, that its optimism was misplaced and it will be disabused of the view that the economy will be OK this year (this is the third year in a row that a bit of good news in the early part of the year had folks convinced that everything was going to be rosy thereafter).

 

Again, the culprit for such silliness is the massive amount of money-printing in the world, which is currently larger than ever. (The Bank of Japan and the Fed combined are conjuring up approximately $1.8 trillion of high-powered money each year, an unfathomably large number, which will ultimately be viewed just as negatively as it had previously been thought to be positive.)

 

In hindsight, I believe the leg up in the gold market, which ended in September 2011 at $1,900, was about people reacting to central bank actions and the positive price response in the gold market brought in lots of people simply because the price was rising.

 

Since then, the chart pattern and the market's reaction to news have been negative, culminating in the giant smash we had on Monday. I believe this drubbing marks the end of the last couple of years of bear-market action in gold, and the next leg up will be a function of people recognizing that all this central bank lunacy has erroneous negative consequences.

 

'The best thing we can do is go on with our daily routine,' said Nurse Ratched

Said differently, the increase in the gold price from $300 to $1,900 was about central bank actions, and the next leg will be about the consequences of those actions. This is because, so far, people have believed there have been, and will be, no consequences, but that is totally untrue. Rising gold prices will silence most of the naysayers, but how fast they may convert into buyers remains to be seen.

 

Perhaps Americans are going to be in denial until the completely rigged Consumer Price Index registers 6%. But  money-printing here and everywhere else is going to lead to massive inflation and other problems, and the only way one can be adequately prepared is to have some exposure to precious metals. (How much is a very personal decision.)

 

Unfortunately, as this recent episode demonstrates, the personality of the metals is quite volatile, given that, besides being a store of value, the metals are "just" a price, which makes it very difficult for people not to become emotional when that price swings to and fro.

 

I hope that description of psychology and what has transpired is a useful framework for people to use to navigate prospectively.

 

At the time of publication Bill Fleckenstein owned gold.

134Comments
Apr 19, 2013 7:58PM
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Perhaps Americans are going to be in denial until the completely rigged Consumer Price Index registers 6%. But money-printing here and everywhere else is going to lead to massive inflation and other problems

 

With the methodology that the government uses today 6% would mean a real inflation rate of about 18%.. The consumers see the effects of this every time they go to the grocery store. Higher prices and smaller packages week after week. The peoples saving rate is going down, and consumer sentiment is falling as those SNAP benefits just don't seem to buy what they used to. 

Apr 19, 2013 10:23PM
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Silver, the poor mans gold might be also be considered if you are a gold believer. Coins could easly be traded for other things if there was a $ collapse  As a industrial metal it  is used in our lives daily. It is also facing a deminishing supply.
Apr 19, 2013 10:50PM
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I find the gold market kind of silly, in a complete financial meltdown the man with the chickens will be much richer than the man with the gold.
Apr 19, 2013 9:47PM
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The U.S. mint sold 153000 oz. of american eagles since gold started it's plunge. The most in three years. There are still believers.
Apr 20, 2013 4:07AM
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Japan has been devaluing there currency for about 13 years now, with a debt to GDP ratio of about 200% they don't have much choice in the matter, this has neither caused hyper inflation or fixed there slow growth. In 1993 we were following in Japans foot steps, we had doubled our debt to GDP ratio in just 12 years and it was still skyrocketing till Clinton enacted the 1993 Omnibus debt reconciliation act. The act increased tax revenues and cut government spending, cut taxes for small businesses and working poor families and mandated a balanced budget. Not one Republican voted for it, saying it was a jobs killer and would ruin the economy. 8 years later we had produced 22.7 million new jobs, reduced the debt to GDP ratio by 10%, had 4 straight balanced budgets, 8 years of a 3.88% growth rate and the longest bull market ever. Is there any real question as to what we need to do, we know what works and what has failed in the past, lets not become another Japan.
Apr 19, 2013 9:05PM
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Great article Bill. An airplane flies through the air and is subject to the forces of the air. 
Paper money is the airplane and gold(silver) is the air.


Give this link a look and tell me if you agree that the banks will charge the next collapse to the depositors and therefore their customers. Sidestepping the taxpayers directly but destroying us all in the end. Cypress was a test balloon.



Apr 19, 2013 11:48PM
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Wouldn't trust the market or gold,  the market will deflate and our currency will collapse because of too much debt and the loss or faith and credit in our dollar. What will matter are basic survival necessities including food, water, clothing, shelter, medical supplies and a means to defend what you have. (Guns and ammo)

 

As long government keeps borrowing, spending and creating endless fiat currency and greater debt, the crash is inevitable. The CBO has been warning Congress and past/current administrations to no avail. Obviously, the debt keeps growing with endless can kicking and out of control spending.

 

I wouldn't trade any survival supplies for gold which won't keep you warm, fed, alive and protected. Wisely planning for that day involves buying what you will need ahead of time before the crash comes while the dollar still has purchasing power.. It'll be too late if you wait too long unable to buy anything with worthless currency and a lack of supplies from late panic buyers.

 

 

Apr 20, 2013 11:48AM
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I bet when the banks went on holiday in Cyprus the people with physical gold and silver could buy whatever they needed.
Apr 19, 2013 9:49PM
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All of us have an opportunity to decide. The Fed chief's college thesis of unlimited money printing to avoid the long term effect that happened in the 29' crash, or Fleck and other's concern for runaway inflation. 

Even if it's somewhere in between, what is wrong with holding a little (or more), insurance?

Thanks Fleck. It's always easy to follow the herd, but in my experience not necessarily profitable.

Apr 19, 2013 9:24PM
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Fleckenstein is right.  With the continuing explosion of socialism and central planning by the current Marxist, only building upon the actions of previous Marxists, the continued debasement and debauchment of the nation's currency, and the total unlikelihood policy will change anytime soon, it is quite clear the current depression (yes, that's what we're in, cooking the books notwithstanding) won't end anytime soon until the farce ends and the system collapses--like it should have been allowed to in 2008.  The old saying, "you can't eat gold.." might well be true, but neither can you eat worthless paper dollars, either.  I can think of a use one may soon have for a US dollar, to be used --in the bathroom.
Apr 20, 2013 9:41AM
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I heard it somewhere, maybe Warren Buffet said it or its just simple strategy.  "I buy when everyone else is selling, I sell when everyone is buying".  Physical Gold and Silver will possibly someday be a currency by default.  If I grow food it can be bartered, if I hold some coins it can be used to trade.  We all hear about how gov't programs are squeezed, no money, need for higher and higher taxes, this is a direct result of inflation.  Sure, BLS standards change, but savy buyers know what the hell is happening.  Inflation is here without a doubt, it is cleverly masked but here.  Paper money is folly in value.
Apr 20, 2013 10:24AM
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April of 2008 as soon as I saw we were going to elect a quasi socialist, either Clinton or Obama I cashed everything out and bought gold.

It can'r be taxed until it's sold and it stays in gold until the inept lying quasi socialist in the white house is an esoteric historical footnote.

Sooner or later inflation will force Bernanke to quit printing money, at that point the market will droplike a rock and make 2008 look like a picnic.

There is only one way to get a stable growing market, that is to have growing stable economy, we don't have that.

Apr 19, 2013 10:24PM
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"What we just witnessed in the gold market, in my opinion, was a panic ..... that has no predictive value."

 

Not unlike what I witness whenever I read an article by Bill Fleckenstein.

 

Apr 19, 2013 9:26PM
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Also, every time a writer who owns gold hypes gold, he gets richer when his readers buy it.  They take a hit due to the already high cost of gold.  Those who got in early get rich.  Those who get in late are suckers.
Apr 20, 2013 11:46AM
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I listen to all of your comments about gold being worthless and it has no use. Have you ever heard the word Numismatic. it is the buying,selling and collecting of coins. It employs' thousands of people in many different facets. Buy a gold coin for 100.00 wait a little while and sell it for 200.00. It's not worthless to me.
Apr 19, 2013 9:38PM
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What I don't understand there is no way there is enough gold to be considered a currency in public hands anyway and I get the idea of investing in commodities something you can touch taste feel  hell even use,but if currency falls wont civilization and principles and fundamentals. Where or what on a one on one basis could gold be traded. My example is this everything somehow implodes or explodes society ,civilization as we know it is gone will I trade you food for gold NO maybe water or medicine but not gold ,if you thinking is clear better I go and be a doomsday peppers it would seem more realistic.
Apr 19, 2013 9:25PM
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Such Austrians.  No Keynesians here.
Apr 20, 2013 1:48PM
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In case of a financial  Apocalypse how would one take gold bullions or coins to buy bread? gas, oil? and other staples?? Even if you own all kinds of weapons? Who will trade??
This does not mean we are not headed downhill and the Dollar would be worthless!

Apr 22, 2013 11:07AM
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My utilites for JUST my wife and I in our house went up approx. $70.00 per month versus last year and no kids at home,so less water ,seware,electricy and garbage.We can afford this but I wonder how the poor do it. And don't get me started on our grocery bill.Inflation is here and the government can't talk about it.

Apr 22, 2013 6:55AM
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Gold/Silver has been the currency or choice for nearly 5 thousand years. Just because some clueless economists/politicians decouple it from our fiat paper money 50 years ago and state that it no longer is money is complete buffoonery. I'm not saying that you should dump everything for gold/silver but any smart investor will retain some percentage of precious metals in their portfolio as a hedge and this is all  that Bill is stating. And whatever you do buy physical not worthless paper. Those of us who bought in the late 90s thru early 2000s when gold was $200 and silver $5 an ounce are very happy we did.
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ABOUT BILL FLECKENSTEIN

Image: Bill Fleckenstein, MSN money

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

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