You might not think of brands when in commodity trading. Yet the unprecedented bull market for gold and the fact that my mother, who is otherwise pretty sharp, just bought in at an historical price high, indicates gold is behaving more like an emotion-driven brand than a commodity.
As part of my writing work for a London-based commodity trader client, I follow key metals and rare earths. Gold has a special historical allure supported by constant “buy gold” advertising on cable and on the street.
Say “gold” and people think of “good as gold”, “gold standard” and “worth its weight in gold”. No other commodity is as seductive. The emotion in the “gold brand” drives demand and price up beyond what rational economic analysis would support. Sure, there are plenty of reasons why gold prices have risen to dizzying heights, but investors should be wary when the “smart” money starts to leave, as seems to be the case with gold. We may be in the early stages of a gold bubble. Joe Kennedy famously claimed to have gotten out of the stock market in 1929 when his shoeshine boy started giving him investment tips. When everyone starts buying gold, think twice about jumping in.
In contrast, an analysis of market fundamentals for silver points to a much better long-term investment. Yet gold is selling at close to 66 times the price of silver, even though silver is only 17 more plentiful than gold. Clearly silver has a brand problem. It wasn’t always so. For thousands of years silver, not gold, was the monetary standard. The 18th century’s dramatic fluctuations in silver supply caused by wars, increased supply from New World mines, and booming trade with the East, prompted the creation of the gold standard. The “silver brand” never recovered.
Despite rational arguments for silver (and other precious metals and rare earths), it just doesn’t glitter like gold and no ads exhort you to buy it. Instead, the “gold brand” is driving amateur investors to buy on emotion. It is illogical to believe the “gold brand” promise as expressed by G. Gordon Liddy: “gold is a time-tested currency that goes up, not down.”
Prices for every commodity go up and down. You can lose your fortune buying gold at the wrong time just as easily as you can go bust investing Yytrium (a rare earth). Ignore the “gold brand” and keep an eye on the gold bubble.