Fool’s Gold: The Mania for the Shiny Stuff Keeps Spreading

There’s no investor too amateur for it and it’s impervious to market forces or basic logic. Where does gold go from here, and will you go with it?

Warren Buffett, the king of value investors, would rather invest in a good company with solid yields than gold. He didn’t buy the gospel, telling shareholders at the annual Berkshire Hathaway meeting this year in Omaha: “You can fondle it, you can polish it, you can stare at it. But it isn’t going to do anything.” (This of course caused Mad Money host Jim Cramer to go typically ballistic, calling Mr. Buffett a “grey-beard” investor, and asking why he wouldn’t “give other people a chance to make some money here”.)

Warren Hatch, a partner and strategist at financial research firm Catalpa Capital Advisor, published a position on gold’s long-term look on July 22, noting that the shiny stuff’s underlying look historically and in this instance isn’t so great. In speaking with The Observer, Mr. Hatch compared it to bubbles of past that should serve as more than obvious cautionary tales: “Gold isn’t going up because of a fundamental reason,” he noted. “Mark Twain once said that history doesn’t repeat itself, but it does rhyme. Five years ago at a cocktail party, people more likely than not would’ve been talking about all the real estate they’re buying.” As for the apocalyptic theories, he conceded that “there are a lot of people who are lobbying more who want to go back to a gold standard, but that argument is completely separate from what gold prices are doing now. For that to even be seriously considered, we would have to be in a far different situation than we are today.” The odds of that happening, he explained, “are miniscule.”

Many of Wall Street’s major institutional investors were still reluctant to get in on it, explained Mr. Carney. “It kills them to think they’ve passed up a profit, but they’re worried that anything that’s gone up 200% over two years could go down 200% over two weeks. It doesn’t make sense that every piece of news is ‘buy gold.’”

Dennis Gartman agreed. “Ask the average Wall Street wiseguy if they’re bullish on gold. They’ll say ‘yeah, you gotta be, we got money problems [with the dollar].’ If you ask them how many hold gold? Very few,” which is where he sees a weakness and potential for an overvalued asset. “It’s a bubble in interest, not in owning. It’s fascinating: everybody’s bullish, but very few are long.”

If they are few, they are prominent, and as convinced of the value of gold as ever. Ben Davies, CEO of London-based investment fund Hinde Capital which maintains the Hinde Gold Fund—the core investment of which is physical gold in a Swiss bank—sees gold hitting $2,000 in four months, and then some. To him and others like him, it’s not just an inflation hedge, but a way of life you’ll soon be adopting.

“This will go beyond popular culture,” Mr. Davies wrote over email from London. In his writings, he didn’t sound apocalyptic. In fact, he was frighteningly, cuttingly rational in his thinking.  The way he saw it, the global economy was in a transitional stage, a maturing phase, the same way one’s voice got deeper as they got older. There were no apocalyptic undertones, but there was a distinct New Age-y feel. “The internet reformation has reconnected individuals with the truism that ‘the desire of gold is not for gold. It is for the means of freedom and knowledge.’ Sounds earnest, doesn’t it? Well,” he wrote. “it’s meant to be—a sound monetary system based on gold is not subject to confidence of the faith and credit of anyone.”

“It cannot be printed or subject to some (mis)interpretation of accounting rules. Neither is it subject to bankruptcy of banks or governments. The physical is not subject to the rules and subversion of exchanges, regulators, ratings agencies or clearing systems … Money is a serious business, and gold is money.”

For all of the mystical intonations, he was simply saying that it’s not a fiat currency.  As Mr. Einhorn cracked wise in November, gold is “the one kind of money [Fed chairman Ben] Bernanke can’t print more of.” So where is it going?

For Mr. Davies, nowhere but up. Gold being celebrated at cocktail parties, “whether for the right or wrong reasons, is not signaling an end, but a beginning.”

Mr. Carney is less sanguine. “Pigs get slaughtered,” he said.

And Mr. Hatch even more so. “It’s going to be a textbook example of the Greater Fool theory: when the price of something becomes divorced from its underlying fundamentals, and the reason the price is going up is because you can find someone else who’s willing to pay a higher price for it. What you’re doing is finding a greater fool than you to buy it. And eventually,” he said, “the fools run out.”

At one point in our conversation, Mr. Gartman stopped me. “Write this down,”

He grew quiet.

“Gold will stop going up when it does,” he exhaled. “That’s it. That’s all there is to know.” Okay.

As for Dad, it was unlikely that he was parting with the Roo I sold him anytime soon–but not because he was pursuing a new career in gold speculation. “Your dead cousin gave it to you,” he said. “It’s a keepsake.”

It was as good a reason as any to go long. |@weareyourfek

Fool’s Gold: The Mania for the Shiny Stuff Keeps Spreading