Forum Archive Index - February 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Nick,

>
> 
>Which leaves the gold stocks to be the domain of Joe Public. And why
>will they buy gold stocks?, most probably because they are basically
>stupid and lazy. They will buy for the same reasons that we bought
>tech stocks in 1999. Because the media, the broker, the advisor, the
>fund manager, and probably the shoe shine boys will be hyping it
>like $2 jugs at a student pub. We are normally so damn lazy that we
>wait to be told what to invest in and accept the instructions
>verbatim. 
>
>

That's a pretty damning view of the average 'investor' (I use that 
word in quotation marks) Nick.   Although I like to think that no-one 
on this forum would behave like that, and that investing serious 
capital demands serious research, I wonder if it is true?

>
>
>It is a little presumptuous to think that this is exactly the way it
>will all play out, but the point I make is that the gold stock
>market will be where the masses will really make the big push before
>it all falls over. 
>
>

How do you know that hasn't already happened?   My usual gauge of 
when the masses are getting involved is when I hear it being 
advertised on the radio.  They've been advertising gold on the radio 
for several months now.

>
>
>The good thing is that you will see it happening
>all around you if it actually happens. The key will be to keep a
>level head and get rid of all that glitters while your neighbor is
>just dipping his toes in the gold bull market.
> 
>

Exactly.  So this gets down to determining your exit strategy.  So 
what are you going to do?   

The closest comparable exercise I can think of is investing in the NZ 
sharemarket in 1987.  It was clearly a bubble and massively 
overvalued (as you predict gold will be), but when the end came, the 
first big drop was sudden and sharp.

I think it is perhaps time to revisit Phaedrus's posts in December 
2002 with the subject line "NZSE40 1987".   If you can draw on the 
parallels between that experience and the gold market of today you 
will see that the index fell from it's all time high zone to half 
that in 4-5 days with the rest of the loss coming through in the 
ensuing 4-5 months.  

Now let's assume a base level gold price of $US280 in 'peace' times, 
today's price is around $US380 and there is a peak price to come of 
$US480.   Let's assume we are expert chartists, like Phaedrus, and 
 get out when the right indicators tell us to do so (ahead of the 
masses).   History shows us that we will not be able to do this at 
the peak when the market drops so fast, but we might expect to get 
out at $US380 as the gold market completes half the drop to its 
expected 'base price' of $US280.  This means that the price of gold 
must rise to around $US480-500 for investors who buy into the market 
today *just to break even*!   And all this assumes that the $NZ/$US 
exchange rate remains just as it is today.

My conclusion is that the extremely competant and disciplined 
chartist may have a chance of just breaking even in $US terms (not 
an attractive proposition), if buying in at today's prices.  While 
the lesser skilled will almost certainly suffer a massive capital 
loss.   It is this sort of awful scenario that keeps gold well away  
from my investment horizon.

SNOOPY

discl: no gold shares



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