Phuket Finance: Gold plunges to 33 year low

PHUKET: The past month has not been kind to anyone who has bought gold recently. With a nearly 9% loss since its January peak, and nearly 14% from last September’s, the precious metal has been anything but.

Last week it had its largest one-day percentage decline since February 28, 1983. For the past 20 months, the price of gold has failed to make a new high since peaking in 2011. With all the hype surrounding gold, gold ATMs (yes they have ATMs to buy gold directly), and my phone ringing at least five times a month from people wanting to buy gold, it appears to have topped and the neckline is now broken. There has been a mania as gold climbed higher and higher. The worst part for holders of gold is that it doesn’t even pay a dividend.

I consider gold to be a ‘fear trade’. When the investing herd or crowd is scared, they buy the shiny stuff because they feel better since it is tangible. Look at the chart above and notice that the price of gold took off on a 10-year spurt right after the dot-com bubble burst in the year 2000 (Fear 1), then when the 9-11 terror attacks occurred (Fear 2). When hurricane Katrina hit the US (Fear 3) and the Great Recession began in 2008 (Fear 4), gold climbed the ‘fear index’. Note that during this 11-year run, the US stock market went sideways and consolidated its gains after a strong run from 1975 to 2000.

In 2010, I taught a series of investment courses at Khun Woody’s Sandwich Shoppe in Phuket. For two years now I have been telling clients and people to avoid all gold exposure. All the while, I’ve been saying that gold had peaked and investors need to increase their stock exposure. The bull market in stocks began in 2008 and we are just now entering a period of increased optimism.

This will bring in a period of good feelings where investors return to the stock market. They’ll begin to buy and move cash out of the bomb shelter (gold and cash) and into funds and take risks. The ‘fear’ or gold trade is now dead and a great bull run in stocks has begun.

Gold price fluctuation is nothing more than a graph of fear. When investors begin to feel good about investing in stocks and the economy in general, this ‘fear index’ will decline, as we are now seeing since 2011. Gold investors are panicking and now we have seen a drop below critical support levels. I expect gold to lag equities for many years to come and global stocks to move much higher.

When the bull market in stocks began in 1980, stocks rose for 20 years as we climbed the excitement, thrill and euphoria stages. During this same time the price of gold went sideways and did nothing for 20 years. I expect a similar hibernation for gold now.

A large reason for the recent bull run in gold prices had been the development of the ETF for gold. It allowed investors to buy gold like a stock. As money went into this ETF, more and more gold was bought, pushing up the price. Now that many of these investors have been burned with their gold holdings, look for gold to continue to sell off as investors in these ETFs unload their gold holdings.

With the clear breakdown last week, gold is not a wise investment for your portfolio. Stock, funds and equities should be bought now. The US stock market is now on the verge of breaking out to new highs after consolidating for 12 long years. I will be an aggressive buyer of US and global stocks and funds in the weeks ahead. The decline in gold is a welcome sign that there is less global fear.

There is increased optimism about global economies and that is good for stocks. Any rally in the price of gold is to be sold into. I suggest anyone holding gold to exit now before prices go much lower. If you would like to discuss the gold market and the outlook for stocks, feel free to give me a call, email or hit me up on Skype. I can suggest ways to exit your gold and transition into stocks and collect dividends to live on here in Thailand.

Don Freeman has over 15 years experience and provides personal financial planning and wealth management to expatriates. Specializing in UK and US pension transfers. Call 089-970-5795 or email: freemancapital@gmail.com.

This article appears in the current issue (May 11-17) of the Phuket Gazette newspaper, on sale at newsstands throughout the island. Digital subscribers may download the full issue, this week and every week, by clicking here.

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— Don Freeman