Posted by Davy on September 10th, 2009 in Investment Strategies, Worth Reading (links to articles, etc.)
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Today’s Wall Street Journal has no less than three articles spotlighting gold’s brief ascent to the $1,000 level. More accurately, the three articles explicitly and implicitly suggest investors stay away from the yellow metal:

• Taking Down the Golden Barrickades [$]
• Gold Loses Barrick Benefit — After a Buying Spree, Firm Ends Its Hedging Program [$]
• Technically Speaking: Golden Eggs: Danger in the Yellow-Metal Stocks [ $]

So the Journal advises investors that gold’s recent $100 run-up is due mainly to Barrick Gold (ABX) buying back their hedges. One of the articles states that a consensus among traders and analysts has arrived to that conclusion (those experts — so useful after the fact).

If that is not enough to convince investors, they bring out a technical analysis article to confirm what the fundamentals (ABX hedging) are saying — gold is overbought. Message received loud and clear: DON’T BUY GOLD!

I’m inclined to agree with the Wall Street Journal on this one but for entirely different reasons. I don’t like to buy anything near its highs (see my latest stock screen for proof) , no matter how bullish I am. But the thesis behind gold bullishness is stronger than ever, despite the recovery from the financial crisis.

I give the markets less credit than most as a discounter of future events — if markets were truly an accurate discounting mechanism of future events, investment success would be hard to come by. Nevertheless, the market is a discounting mechanism, however shabby, and savvy investors realize that the fall-out from economic stimuli packages are likely to spur gold demand.

Gold is attractive in times of macro-economic distress. This is why both deflation and inflation proponents advocate investing in precious metals.  As governments around the world continue to prop up their economies, budget deficits and currency instabilities worsen. Right now, there is no exit strategy in sight and any sensible investment strategy must consider alternatives to the US dollar.

Where gold goes in the short-term, I do not know. I do not recommend buying at these levels (near record highs) — the market may give investors a chance to get in at better levels. If not, sometimes as a value investor, you just have to miss the bus.

I am looking to perhaps lock in some profits on some gold miner positions. Look for an update on those stocks next week. As for the metal itself, despite the mainstream media’s continued marginalization of the asset class, gold lingers near its nominal record high. But it remains well below its inflation-adjusted high, which is over $2,000 per ounce.

Don’t be fooled by the herd. Gold’s long-term investment case remains intact and it has little to do with Barrick’s hedging program.