Anyone who knows me knows that I am no fan of gold. I say that despite the fact that I was a Comex gold trader myself. I spent several years in the late-'80s on the floor of that exchange as an independent trader. However, I don't believe gold is an investment, nor do I agree with the silly argument that gold is money. If you believe we still dig our money up from out of the ground, then I suggest you venture outside of that cave you've been living in.
Gold is not an investment nor is it money (in my view); however, it's something that you can trade. There are highly developed trading markets for the metal, and from time to time, when it gets very cheap, I don't mind buying it for a couple hundred points or so.
On the other hand I've found that trying to pick tops is a little trickier, because when the gold fever really gets going it always seems to take the metal far beyond any rational valuation, and I am not good at determining the level of people's insanities.
A while ago, in an article (several articles, actually) here on Real Money I said that gold would bottom right after the Fed raised rates. I went into a detailed discussion at the time, covering three principal reasons.
There was the fact that rate hikes equated to price increases, and gold would discount those price increases and the eventual inflationary pick-up by trading higher.
There was the fact that rate hikes were a fiscal injection, or fiscal stimulus, however you want to call it, by virtue of the fact that the government is a net payer of interest, so hiking rates would necessarily increase government spending. (It's real money printing, not the fake kind that everybody thought was happening under central bank monetary operations.)
Finally, there was the reverse psychology aspect: that is, everyone and their brother thought that rate increases would be the death knell for gold, so therefore it had to end up being the opposite. This was a sort of "buy the rumor sell the news" kind of event.
Since that Dec. 16 rate hike, gold has been rallying. As an aside, the other day I was at a biotech conference here in New York and all I heard the attendees talking about was the gold rally, so it may have gotten a little overdone in the short term.
That being said, I still think there is more upside to the gold rally. I particularly like Goldman's "sell gold" recommendation that it just came out with. I like it as in, I like the idea of fading it.
In Goldman's view, the rally has been due to the stock market crash and general fears about the global economy. However, Goldman, like myself, is bullish on stocks and thinks much of the selling has been unjustified.
Where I think Goldman doesn't see the bigger picture is in the fact that fiscal expansion will be the real driver behind the gold rally, and fiscal expansion will continue this year. Granted, the last part of the gold rally was probably driven to a large degree by people exiting stocks and looking for safety, but that will end up being just a short-term correction, and I wouldn't go shorting the metal looking for a resumption of the bear market. That is over.
Along those same lines, the recent panicky collapse in bond yields and the swoon in stocks, not just here, but globally, does not alter my prediction that the Fed will raise rates several more times this year and it will prove bullish for gold for the reasons I stated earlier.
Today the news stories are about a $20 decline in the metal's price. My recommendation is to do a little buying, because the correction will probably be short-lived. And if I know Goldman, they're probably doing the exact same thing.