If you buy an ounce of gold today and you hold it for a hundred years… you’ll have 1 ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farmland and it will produce for you every year.
– Warren Buffett
Gold holds a special place in investors’ minds.
When I speak at investment conferences, I could be speaking about any topic…
The top stock picks of the world’s leading investors…
The latest market-trouncing “smart beta” exchange-traded funds (ETFs)…
Or the myth of China’s investment miracle.
Still, I’ll invariably get the following question…
“So, Nicholas, what’s your outlook on the price of gold?”
I then take a deep breath… because I know my answer will disappoint them.
It marks the time I have to come clean and confess that I am not “one of them.”
I am not a “gold bug.”
What Makes Gold Special?
For millennia, gold has enjoyed a unique status as the ultimate store of value.
Gold bugs love to point out that during Roman times, you could buy an expensive suit (toga?) for a 1-ounce gold coin.
Today, you can still buy a similarly expensive suit for the value of an ounce of gold.
Gold remains the ultimate safe-haven investment when the stock and bond markets head south.
I think the real reason investors focus on gold is this…
Between 2001 and 2011, gold rose from $257 per ounce to a high of $1,837 an ounce.
That’s a massive 615% increase.
And investors are hoping for a repeat performance.
The Rise and Fall of Gold Bugs
The rise in the gold price also made gold bugs seem like the smartest guys in the room. (My response? “Never confuse brains with a bull market.”)
But gold bugs have lost their cachet as their doom and gloom predictions proved false.
The U.S. economy did not implode (permanently) after the financial crisis of 2008.
The U.S. Fed’s Quantitative Easing program failed to usher in an era of hyperinflation.
And gold never hit $5,000 an ounce.
This left many gold bugs with egg on their faces.
A case in point is the University of Texas (UT) board member and hedge fund guru Kyle Bass.
In April 2011, Bass advised UT to take physical delivery of 664,300 ounces of gold – worth nearly $1 billion at the time.
Seven years later, UT’s gold stash is worth around $825 million.
Bass’ ill-timed advice cost UT roughly $175 million based on the gold price alone.
And that doesn’t include another $1 billion in foregone profits had the endowment just invested in the S&P 500 Index.
How I Think About Gold
Here’s the uncomfortable truth…
Gold is a speculative asset. Its price is driven almost purely by sentiment.
Gold pays no interest. In fact, it costs you money to store it. And you can’t really model the financial value of an asset that does not pay any income.
For my money, Warren Buffett made the most compelling argument for not owning gold.
On May 7, 2012, Buffett told CNBC:
When we took over Berkshire, it was selling at $15 a share and gold was selling at $20 an ounce. Gold is now $1,600 and Berkshire is $120,000.
Since then, gold has fallen to $1,240… and Berkshire Hathaway (NYSE: BRK.A) shares have risen to $284,000.
(Not that a mere 230-fold difference in returns would ever convince a gold bug.)
Yes, you could still buy a nice suit today with the gold coin you invested in instead of Berkshire.
But a single share of Berkshire could also buy you a townhouse in parts of Florida.
Which would you choose?
A Golden Opportunity?
I don’t believe gold should occupy a special place in the range of possible investment opportunities.
But I do think it might be on the cusp of a short-term trading opportunity.
Let me explain…
Technically, gold is massively oversold. It has dropped from $1,360 to $1,240 an ounce since mid-April. By all conventional technical measures, it is due for a bounce.
Seasonally, gold tends to fare best between July and October. If you want to bet on the yellow metal, this is the time of the year to do it.
Finally, sentiment toward gold is near a 10-year low.
The latest data from the Commodity Futures Trading Commission shows that money managers are net short gold futures for one of the few times in more than a decade.
And when money managers have been short gold in the past, it returned an average of 13.4% over the following three months.
None of these factors alone are enough to tip the scales in favor of gold. But taken together, they offer a robust risk-versus-reward trade.
My only hesitation? Gold has yet to enter an uptrend.
And I will never recommend you try to catch a falling knife.
So keep an eye on gold in the coming days and weeks. If it does turn upward, consider hitching a ride on the train…
And look to ride it until the gold price hits $1,370.
That equates to $130 on the world’s most popular gold ETF – SPDR Gold Trust (NYSE: GLD).