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How to Handle the Coming Gold CorrectionBy
Friday, January 21, 2011
It's not natural.
As our friend and master investor Chris Weber recently noted, never in the past 200 years has a widely traded stock market or commodity registered 10 consecutive years of higher prices.
But as of December 31, 2010, gold has. Gold's 10 consecutive years of higher prices is an astounding, once-in-eight-generations occurrence.
Here's the thing: That uninterrupted 10-year uptrend is not a natural state for gold. It's not a natural state for any asset.
Knowing this... and knowing that even the biggest, healthiest multiyear bull markets need to take "breathers," it's as natural to expect gold to correct and end the year lower as it is to expect someone who has run flat out for 10 miles to take break.
How deep could gold's "break" go? Below is a 10-year chart of gold. As you can see, gold could correct all the way down to $1,100 an ounce and remain in the confines of its big bull trend.
 Most people who own gold would freak out about a 20%-plus drop. That's because most people who own gold view it the wrong way. They think it's an investment... and they'd like to get filthy rich from it. That's not how the seasoned investor views gold.
Gold isn't an investment.
A thousand shares of health-care company Johnson & Johnson is an investment. J&J pays a dividend. It's a stable, profitable business that's going to grow its cash flows and distribute a portion of those cash flows to it shareholders.
An income-producing rental property is an investment. Bought at the right price, a rental property will return all your original capital in the form of rent checks.
Gold isn't like those two examples at all. Gold doesn't pay interest or a dividend. It doesn't have profit margins. You can't price it based on earnings.
Gold is money. It's a real, hold-in-your-hand form of wealth. The hot shots on CNBC dismiss gold's role as money as a bubble or a fad. I have to agree with them... It's just a passing fad that has lasted for 5,000 years. It should only last a few thousand more.
Gold has been used for money for thousands of years because it's easily divisible, it's easily transportable, it has intrinsic value, it's durable, and its form is consistent around the world. And as our friend Doug Casey reminds us, it's a good form of money because governments can't print it up on a whim. You can't Bernanke your way to wealth with gold. You have to work and save to accumulate it.
In sum, could gold suffer a big correction from here? Absolutely. It's had an amazing string of gains. Gold is well within its rights to take a break. That break could easily shave hundreds of dollars off its current price.
But when I look at the U.S. government's absolutely stupid "kick the can down the road" approach to our fiscal problems... when I hear howls from special interest groups after even small government spending cuts are suggested... I begin to see a potential gold decline as a huge opportunity to accumulate more real wealth.
That's why if a natural gold correction occurs in 2011, I'll be buying more.
Good investing,
Brian Hunt
Further Reading:
"You don't ever see a major market go up 10 consecutive years," Chris Weber recently wrote about gold's unprecedented bull run. "At some point, you throw up your hands." But Chris still believes gold is headed higher... and he made his long-term predictions here: The Most Astounding Gold Development I've Ever Seen.
Market NotesAN UGLY "CHINA CHART" There's a dramatic and dangerous story developing in the Baltic Dry Index (BDI)...
The BDI tracks the cost of shipping "dry bulk" commodities like coal, iron ore, and grain. If the global economy is humming, demand for raw materials rises, which boosts shipping prices. If the economy is in the dumps, demand for raw materials falls, which puts pressure on shipping rates.
For example, during the 2008 credit crisis, the BDI suffered a spectacular 93% decline... Then as the global economy got "less bad" in 2009 and 2010, the BDI enjoyed a rally to the 4,000 level. But as you can see from today's chart, the index has plummeted to its lowest level in nearly two years.
There's a big "China worry" angle to this story. China is the world's largest and most voracious consumer of raw materials. This makes it a huge driver of shipping rates. If the BDI is plummeting, it's a sign China's economy is slowing and sputtering. Keep this development on your daily "watch list."
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