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Tuesday, July 02, 2013 1:59 PM

Ritholtz on Gold and on Making Predictions; How Secular Bull Markets End; Winning vs. Investing

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Folly of Forecasting

Inquiring minds may be interested in this flashback from Barry Ritholtz originally written published June 2005 and republished March 27th, 2011 on The Folly of Forecasting.

It’s very easy for a confident-sounding analyst, fund manager or professor to say something on TV that can throw off the best laid plans of investors.

I wish an SEC-mandated disclosure accompanied all pundit forecasts: “The undersigned states that he has no idea what’s going to happen in the future, and hereby declares that this prediction is merely a wildly unsupported speculation.”

Don’t hold your breath waiting for that to happen.

Is Gold Overdue for a Bounce?

One Day ago Barry Ritholtz pondered the question Is Gold Overdue for a Bounce?
If you are a trader — and I no longer consider myself one — then you have to be wondering when Gold is going to bounce. It has plummeted on little inflation, a strong dollar and an improving economy. When the breathless narrative of hyper-inflation, collapsing fiat currency and end of the world failed to come about, Gold’s spectacular rise ended.

[Mish comment - depending on one's timeframe, that last sentence may easily be construed to be a prediction, the rest of the sentence is hyperbole]

Now, it has free-fallen so far that a counter-trend rally is over due.

[Mish comment - Is that a prediction or a suggestion?]

The charts below show two different ranges where gold can find a footing and rally. That is likely to present your next and perhaps last best exit.

[Mish comment - Is that a warning and a prediction, or just a suggestion?]

Barring some new developments — like all the gold in Fort Knox becoming irradiated — I do not expect to see a resumption of the 2001-11 uptrend.

[Mish comment - That is  an expectation, not quite a prediction, yet complete with preposterous hyperbole regarding all the gold in Fort Knox becoming irradiated]
Don’t Be Fooled; Sell Gold at $1,400, Then It’s All Downhill, Says Ritholtz

Today on Market Ticker Ritholtz says Sell Gold at $1,400, Then It’s All Downhill.
“I wouldn’t be surprised to see a nice bounce in gold from this level up to $1400, $1440, but I don’t know if it’s sustainable after that.” His advice to investors: “Hit the bid” once gold climbs to near $1400... $600 to $800 an ounce is certainly a possibility.”
Ritholtz was very careful to make his predictions sound like non-predictions while asserting the "gold bull market is over". Of course that assertion itself is another prediction.

Gold Monthly Trendline

Whether or not the trendline is broken depends on how you draw it, but I suspect that even Ritholtz would have to admit the above interpretation is reasonable enough. And if the above trendline is intact, then it's impossible to say whether or not the secular bull market is over.

Gold 1972-1981

Between 1972 and 1980 there were three selloffs of 30% or greater one of which was a 50% selloff. Was the gold bull market over? Certainly not the secular bull market.

Is the secular bull market over now?

I doubt it, but I suppose it's possible.

Why do I doubt it? Because secular bull markets tend to end with public participation in a massive way and prices going parabolic.

Here are some examples: Gold and silver in the 1980s, tech stocks in 2000, housing in 2005, the stock market in general in 2007 and arguably again (this time on the misguided belief the Fed has the markets back and nothing can go wrong).

How Secular Bull Markets End

Anyone recall Time Magazine going "gaga" over housing, using exactly that word on the cover? A Summer 2005 cover marked the secular peak in housing.

What follows next is a repeat of my April 10, 2010 post US vs. Japan Land Prices Pictorial Update
In Spring of 2005 I announced It's a Totally New Paradigm

In June I announced It's time to shift the arrow on the basis of Time Magazine going gaga over real estate.

In December I wrote that It's Too Late.

When you see stuff like this, not only is it too late, it's way too late.

I am pleased to announce that we have moved the arrow once again.
The current picture looks something like this.

Grave Dancing

Ritholtz claims to be agnostic regarding gold. I suggest his current hyperbole proves otherwise, even though he once liked the metal.

For the record, Ritholtz is a good guy, we just happen to disagree regarding gold. 

And I certainly side with Ritholtz regarding the folly of $10,000 or even $3,000 gold predictions by hyperinflationists, especially when people put timeframes on them.

But not every gold fan is a hyperinflationist or an inflationist of any kind. As a staunch deflationist, as well as someone who is definitely not agnostic regarding gold, I am proof enough.

And who is it now that is coming out of the woodwork to dance on the grave of gold? It's a Plague of Gold Bears Now Say "Gold Unsafe at Any Price".

What's the Real Long-Term Driver for Gold? Click on the preceding "Plague of Gold Bears" link to find out.

Gold - The Despised Asset Class

In Gold We Trust

The above chart is from the report In Gold We Trust by Incrementum AG

Incrementum concludes (and I agree) ...
We are firmly convinced that the fundamental argument in favor of gold remains intact. There exists no back-test for the current era of finance. Never before have such enormous monetary policy experiments taken place on a global basis. If there was ever a time when monetary insurance was needed, it is today.

Gold is the only liquid investment asset that neither involves a liability nor a creditor relationship. It is the only international means of payment independent of governments, and has survived every war and national bankruptcy. Its monetary importance, which has established and manifested itself in the course of the past several centuries, is in the process of being rediscovered.

Contrary to 1979/1980, the current gold bull market will unlikely end due to a sudden strong rise in interest rates, as the balance sheets of governments, households and corporations are tainted by huge debt. In the current environment, this would lead to a deflationary depression. According to the BIS, the combined debt burden of governments, households and non-financial corporations in the 18 OECD core countries has risen from 160% of GDP in 1980 to 340% of GDP in 2012.

In order to counter the current problems in the financial sector, but also in the real economy, the Fed, the Bank of Japan, the Bank of England and the ECB are going to continue to hold interest rates at a low level. There has always been a strong link between negative real interest rates and the gold price.
Is It Different This Time?

Did the bull market end with bears coming out of the woodwork and gold's share of financial assets a mere 0.5%?

Price Targets

People keep asking, but I have no price targets for either gold or silver. Within a couple years, neither $1,000 nor $2,500 would shock me for the price of gold.

However, history suggests the secular bull will not end without the public going gaga over the stuff.

Winning vs. Investing

Ritholtz says he no longer considers himself a trader. I am in the same camp. I consider myself an investor (with all the problems that entails, including the ups and downs of positioning for long-term trends).

Cyclical bear markets make things tough, especially when a parade of bulls thinks the Fed can keep other asset classes levitated forever.

Sometimes long-term positioning makes one look silly in the intermediate timeframe, and sometimes not. But I like my chances here with gold, whether or not "all the gold in Fort Knox is irradiated".

I don't recall who first said this, but "If investing was easy, it would be called winning, not investing."

Mike "Mish" Shedlock

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