Never Ask an Elf for Advice

Those of us who love the writings of J.R.R. Tolkien probably remember this quote, “Never ask an elf for advice for he will say both yes and no.” While poking about the Internet looking for something interesting for this blog, I came upon a brief video predicting a drop in the price of gold. The man was using a basic form of technical analysis (such people are sometimes called elves). He drew a line with a crayon across the top prices of gold over the last few months. Since the line was relatively flat, the commentator assumed that gold is trading in a range, that it is near the top of its range, and it is about to go down. He might be right.

It is hard to turn on the radio without hearing an add touting the virtues of gold as investment. These promoters point out that gold has outperformed the stock market over the past five years and gleefully predict that it could double in price over the next year. They might be right. I have found reputable analysis that stated gold should be sold, that gold should be bought, and that if you already own gold you should neither buy any more nor sell what you already possess. Schwab, my brokerage house, subscribes to Market Edge, a technical analysis service. They rate gold as neutral and point to indicators that state it will go up and indicators that state it will go down. Oh, those elves.

For some reason most of humanity seems to have considered gold as money for at least 5,000 years, maybe longer, so gold is money. Gold seems to go up in value when people are afraid and down in value when they are confident and happy. For the past five years gold has followed a jagged unpredictable climb in an upward direction. The average increase looks pretty linear. There is clearly a positive correlation coefficient but it probably isn’t very high. One of the articles I read fears that gold might become the next bubble. The author may be right, but I don’t think there is any danger of that happening in the foreseeable future. Bubbles happen when prices go parabolic. Look at what happened to gold in the late 1970s and early 1980s. Now that is a bubble.

For the record, I own gold in the form of shares of an exchange traded fund, SPDR Gold Trust (ticker symbol GLD). It can be bought and sold like any stock and does not require a treasure chest buried on a deserted island for safe storage. If the price of gold goes up, I will be happy. If sometime in the near future, the price of gold goes down, I will buy some more. I am not there yet, but at some point in the future I would like to have about 5% of my investments in gold. I think over the long run the value of the American dollar is going to decline relative to the value of gold. The Chinese government is buying more gold and fewer U.S. Treasury Bonds. Indians have long prized gold as foundation of a family’s wealth. They are getting richer and they are buying more gold.

If you will kindly indulge my sense of humor let me end with some wisdom from Kenny Rogers.

Now ev’ry gambler knows that the secret to survivin’
Is knowin’ what to throw away and knowing what to keep.
’cause ev’ry hand’s a winner and ev’ry hand’s a loser,
And the best that you can hope for is to die in your sleep.