Are precious metal prices headed for a major crash? (Part 1 of 2)

Note: For the sake of simplicity, and since gold and silver nearly always move upwards or downwards in tandem, throughout this article, unless otherwise noted, the term “gold” is used interchangeably to mean both gold and silver.

Although you’d hardly know it to read the Wall Street Journal or to watch CNBC, for the past two consecutive years, gold and silver have been the top performing assets, besting every other commodity, the S&P 500, tech stocks, mutual funds, and every other common investment vehicle. More strikingly, over the past 10 years, the price of gold has grown from a low of $255.50 in 2001, to a high of $1,435.70, reached early this month; an 18.9% annual rate of growth with a total 10-year growth of 561.9%. While at the same time, the price of silver has seen steady growth from a low of $4.02 in 2001, to a high of $36.13, reached earlier this month, representing a 24.6% annual rate of growth and a total 10-year growth of 898.8%.

$1000 invested in gold in 2001 would be worth nearly $6,000 today, and that same $1000 invested in silver would be worth nearly $9000. By comparison, $1000 invested in the S&P 500 in 2001 would have earned a profit of a mere $1.60.

Why then does gold attract so little attention by investors? Why are so few invested in such high-performing assets (gold accounts for only 0.3% of global investment )? Perhaps it’s due to the fact that, for the most part, the only time gold gets any real attention in the mainstream financial media is when there’s a significant price drop or a week or two of sideways trading. When this happens, just like clockwork, armies of pundits will crawl out of the woodwork to loudly declare that gold might be in a bubble. Here's an example of such, from our trustworthy friends at the London Telegraph, published on March 8th, when spot gold closed at $1,428.90 and spot silver closed at $36.06:

Patrick Connolly, of the financial adviser AWD Chase de Vere, said: "There continue to be bullish statements and bold predictions about gold and the assumption that the returns seen over the past decade are now the norm. There were similar sentiments in 1999 about technology stocks, and the belief that the only way was up."

As he pointed out, there is a real danger that this could be a "gold bubble", and when prices do fall - which they will at some point - the correction could be far sharper and last longer than many people expect. He added: "It's easy to forget that gold prices can go through prolonged downturns. During the Eighties and Nineties, the price of gold fell by 70pc."

Martin Bamford, a chartered financial planner with Informed Choice, said: "Investors are understandably concerned about inflation at present. But there is a real risk that those now buying gold are doing so at the top of the market and will end up making losses when prices fall."

He added that investors should remember that gold does not produce any income, in terms of either interest or dividends, so returns are based solely on capital growth. He said: "It can also be difficult to access as an asset class: many people end up buying funds that are largely invested in mining stocks, which don't always reflect gold prices accurately."

This week, as it has been so many times before over the past decade, a temporary weakness in gold (I only mention gold because silver is almost never discussed -- it’s much easier to simply pretend that it doesn’t exist, and that the huge gains over the past few years simply didn’t happen), and a significant drop in price, was again seized upon in an effort to intimidate those who haven’t fully excommunicated themselves from the religion of Wall Street, because as we all know, fear is the weapon of choice for any religious fanatic.

Perhaps no better is this demonstrated than by this March 16th gem from CNBC, noting not only that gold (apparently unequivocally) is in a bubble, but that this bubble is finally on its way to bursting:

Gold is currently in a bubble and investors need to apply some common sense when trading it, as it will likely fall on interest rate tightening, according to Yogi Dewan, the Founder and CEO of Hassium Asset Management.“Back in the 1990s gold traded at $400 an ounce. It hit $253 in 2001 and is now trading at $1,400 an ounce,” Dewan told CNBC.com on Wednesday.

“This is a bubble and a fear trade,” he said. “As soon as the recovery takes hold and the interest-rate cycle changes you will see mass outflows from gold into riskier assets.” When this happens, gold will head back towards $1,000 an ounce, he said.

I can only imagine what surely must be their gleeful revelry as they celebrate that all of the crackpots, loonies, and financial doomsayers who have invested in precious metals will soon get their comeuppance for failing to believe in the dogma of Wall Street’s infallibility and invincibility, and the supreme wisdom of the Federal Reserve. Keynes has been vindicated once again, and all is well in the universe. That is, until gold inevitably picks back up again and smashes through its prior resistance level...

With gold garnering so much negative attention in spite of its stellar performance, this nonsense tends to lead one to ask oneself, “Why does Wall street hate gold so much?”

As best as I can tell, based on what I’ve gleaned from the self-imposed limited contact I’ve had with these types, the typical “Wall Streeter” subscribes to a particular (and peculiar) religion. This particular religion sees gold as an obsolete relic of a time before civilization, before the dollar was the supreme ruler of the universe, and before nearly incomprehensible wealth could be created instantly from thin air, as needed.

Gold is the antithesis of their faith, and so like all religious fanatics, they attack it with the same combination of contempt and hatred that has been used since the beginning of time to malign and persecute those with with the “wrong” religious beliefs. They attack when they sense weakness, preying upon the natural fears of the enemy, while simultaneously reassuring their brethren that they’ve not chosen the wrong religion and that their holy trinity of the dollar, the S&P 500 and the DJIA, is and shall always be supreme. These attacks continue for as long as weakness in gold is seen, but then, when precious metals inevitably begin to rise again, their sermons are silenced. For yet again, they are forced to accept that return of their messiah is not now, but of course is still nigh, and so they grudgingly retreat to Park Avenue penthouses to eagerly await His return.  Occasionally, they will briefly emerge, when gold seems about to break through record highs, to issue dire warnings about the foolishness of belief in anything but Wall Street, and the hellfire of eternal economic damnation that awaits the non-believers, before vanishing once again.

Their faith is puzzling however, given that over the past 10 years, the dollar (USDX) has had a negative annual growth of  4.2% with a total 10-year decline of -65.5%. In just 10 years, nearly two thirds of the value of the dollar has evaporated, and the 10 year annual growth rate of the S&P 500 has been a mere 0.16%. I’ll refrain from making a direct comparison of the performance of gold and silver in real dollars to Wall Street’s real dollar performance, lest I provoke a holy war with the other side.


Perhaps their faith, which had been waning, has been re-energized by Wall Street’s performance over the past two years, where the S&P 500 has seen an annual growth rate of nearly 31%. Surely though, they must recognize the correlation between the Fed’s money printing program, or Quantitative Easing (QE), and the sudden positive reversal on Wall Street, right? They cannot possibly believe that this is merely a coincidence, and so it must be reasoned that they know that the market’s recent strong performance is merely a product of a lot of extra cash floating around. If this is true, then it must also be true that they believe that the momentum that the Fed has injected into the market is self-sustaining, otherwise what would be the point of propping up the market only to let it fall back down?

Clearly though, there is no economic recovery, and Wall Street’s recent performance is absolutely no reflection of the economy as a whole. This is patently obvious because widespread unemployment continues unabated, food stamp participation is at an all time high, the national debt is over $14 trillion dollars (and growing by more than $40k per second). Moreover, California, New York, Illinois, and numerous other heavily populated states are essentially bankrupt. Municipalities across the country have been forced to consider filing bankruptcy, or have already filed. Thus, one is left to wonder how Wall Street expects the market to continue its recent performance, when all signs point to down; unless of course they are hoping for and expecting an endless series of liquidity injections, courtesy of the Fed, to maintain market performance and stability.

To be sure, the timid investor, who may have been considering buying precious metals will certainly be dissuaded by the propaganda against gold, and the uneasy investor who isn’t already mostly certain that he made the right choice by investing in precious metals is probably going to take a second look at his decision. It is certain that people who, lacking either common sense or critical thinking or both, are so easily influenced by “authority figures”  and succumb easily to fear. Fear appeals to our most primal emotion, and since fear is the antagonist of logic and reason, these people will ignore facts and perhaps even their own intuition, in favor of protecting themselves from the perceived impending doom that they may soon face.

Then again, there are those of us who aren’t persuaded by fear. We cannot be bullied, only bargained with. We believe that right now, precious metals are simultaneously the most profitable and the safest investment vehicle available. We have reached this conclusion not because we were born with an affinity for shiny things, but because at some point the realization dawned on us that Wall Street is a scam. Wall Street doesn’t exist to make the average investor wealthy, it exists to extract as much money from the average investor as possible by promising big returns, if only the investor is patient. The only real wealth that is created is created for Wall Street, as endless cycles of boom and bust part small-time investors -- those who actually work for a living -- from their hard earned money.

In part two of this series, I will put forth what I believe is a most-compelling case for the investment in and ownership of precious metals, I will detail the reasons why every investor needs to make precious metals a significant portion of their portfolio, and I will offer a point-by-point repudiation of the fallacious arguments against investing in precious metals, such as have been foisted upon us by the religion of Wall Street.