Sunday, July 3, 2011

Has the Minerals Market Stalled?

The price of silver has dropped and remained flat in the last couple of months.  Has the minerals market stalled? 

I have noted time and again that the rush to buy Gold is an alarming trend.  Unsophisticated investors are being sold minerals on television, and some really dumb people (I've met them) are buying.  And like most get-rich-quick schemes, the only people making money are the sellers, not the buyers.

Now don't get me wrong, like anything else, the long-term trend in minerals prices will be UP, if nothing else, due to inflation.  But like the overheated housing market, minerals have taken off like a rocket in recent years.  And the secret to deals like that is to be on board the rocket before it takes off.

Silver recently crashed and flattened out.  Yes, it is still trading above historic prices, but it is a long way from the nearly $50 an ounce it once commanded.  And who bought at $50 an ounce?   Yup, Joe Consumer, who was convinced that Silver was "the next big thing!"

It wasn't.

Gold seems to be stalling as well.   While historically Gold prices are up - so is the price of everything else.  Yes, you can look at a stock chart from 1980 and say "Gee, stocks were cheaper back then!" and then argue that they must be a good deal now.   But there is a flaw in that thinking - a lot of stocks from back then (such as GM, for example) are worth nothing now.

Gold will never go down to nothing, of course, so in that sense, it might be a "safe" investment.   But history has shown that it can drop to half its value overnight in some instances.  And it may take decades to regain its value.  Losing half your portfolio could be problematic.

And even if it doesn't drop dramatically, if it just sits there, it ain't doing much for you.  And as I noted in an earlier post, since the nadir of February 2009, Gold has yet to outperform the Dow Jones Industrial Average.  In other words, if you are buying Gold now, you really can't turn your nose up at those mutual fund people, as you are doing no better than they are.

In recent days, Gold has once again dropped below the magic 1500 number.  It has jumped up and down in the last few months, around this 1500 number, but not seeming to want to go higher.  And a commodity that just stays the same in value is not really making any money for you.

Gold has sort of flattened out its meteoric rise as of late.   If you bought gold in the last two years, it has hardly outperformed the stock market.

Of course, the question is, can you time the market?  When is the best time to sell your gold?  When is the best time to buy?  Without a time machine, such questions are meaningless.   We all like to think we made smart decisions by buying low and selling high.   But in most cases, we are not brilliant, just lucky.

At the time of this writing, Gold has once again dipped down below the magic $1500 an ounce mark, loitering at $1485 over the fourth-of-July weekend.  And any good news about the economy - national or world - will continue to drop the price.  Greece adopting austerity measures, the US balancing its budget, that sort of thing - which will inevitably happen, of course - will reduce the panic and fear that has been driving the market.

I could be wrong, of course, but I think we are seeing the peak in the Gold market and the start of a stagnating trend.   By the end of the year, if the situation in Mideast countries settles down and the US draws down from Afghanistan, and unemployment continue to decline, we may see the price start to drop - precipitously.