Gold Haters vs. Gold Bugs

Gold bugs everywhere, this week's contrarian chronicle by Bill Fleckenstein will be music to your ears.

I agree with BF that there are a lot of rabid, irrational gold haters out there. I guess it's only fair in the sense that their existence is probably a reaction to that of the equally rabid and irrational end-of-the-world, back-to-the-stone-age variety of gold bugs. However, what the bears seem to overlook is the simple fact that, considering the current global economic and monetary situation, gold is widely perceived, by default, as the only stable currency. Given that perception, it's only normal that it should rise (and it has been all in all a gentle rise so far: gold doubled in the last 5 years) against all fiat currencies.

As Warren Buffet so eloquently says in his latest letter to the Berkshire Hathaway shareholders:
"Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation".

That's why I truly believe gold should be a fixture in every investor's portfolio. Should the rise go parabolic, which very well might happen in the next few years, I'll have to reconsider. It hasn't happened yet as shown in this weekly chart of GLD, the gold ETF (click to enlarge). It has been a little overbought lately as evidenced by the Slow Stochastic indicator, though not by the 14-week RSI. I think what really attracted the gold bears to this chart is the apparent double-top near the nice round $1,000/ounce number (equivalent to a little below 100 for GLD). Therefore, I wouldn't be surprised to see continuing selling pressure, possibly bringing GLD down to last January's low at 78.87. As long as GLD does not decisively break below 70, the 2006 high that proved formidable support during the "Great Liquidation" of Fall 2008, I will hold on to my theory.

Since the Madoff scandal broke, it has become very fashionable to label everything a Ponzi scheme. Housing was nothing but a Ponzi scheme. The stock market between 2003 and 2008 was a Ponzi scheme. So was the oil market. The government bailouts and the stimulus package are giant Ponzi schemes, etc... The Ponzi scheme meme (no rime intended) is now being used by the gold bears. The problem with such an argument is that it's not really saying anything...unless you consider that every situation where somebody buys something with the hope of selling it later to somebody else for more money is a Ponzi scheme. Personally, I prefer calling it capitalism.