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Commodity Insight: Every dog has its day

Gold prices hit a new 11-year high this week and it seems timely to repost a column I penned on Dec. 4, 2009, entitled “Every dog has its day,” from my book, “Haunted By Markets." Keep in mind, as a subscriber to this newspaper you receive my book at no cost if you take advantage of my Special Offer regarding my twice-a-day newsletter, Commodity Insite. Let me hear from you. Call me 406-682-5010.

Every dog has its day and so does every market. At some point, a market will come into its own and stage a rally that is spectacular. When that time arrives, prices cannot be held in check.

Values soar to levels that are simply breathtaking. And over the past few years, the number of markets that shot into the stratosphere when their time arrived are numerous and varied.

Not long ago, Kansas City wheat prices rallied from $4 to $26 a bushel. Copper prices skyrocketed from $190 to $850 a ton. Crude oil shot from less than $20 to $145 a barrel.

Several livestock and grain markets have performed in a similar manner, including rice, sugar and cocoa. The list of markets that have rallied to where the air is rarefied is a long one, and it is no longer an uncommon event.

Gold is a market that has come into its own. In November, the yellow metal only saw two losing sessions and gained 13% to post the largest one-month gain since 1999.

For the year, gold has soared 33%, showing gains in 17 out of the past 20 weeks. And despite gold being historically high priced, investors and the hot money funds in search of hot markets are lining up as buyers convinced the yellow metal is still a bargain.

Over the past 10 years, gold rose 270%, outperforming both stocks and real estate as an investment. Gold tends to do well in periods of currency crisis and with the U.S. dollar resting on a 14-year low and equities far below the levels of two years ago, there has been a mad rush into the yellow metal as a safe haven.

But this is not the first time gold has come into its own. In 1980, the greenback was also in trouble and equities slumping.

Consequently, gold was bid up to the unheard of price of $850 an ounce. Once the market peaked out, however, gold fell back to $350 an ounce and remained depressed for 20 long years.

That means if you bought gold in the early 1980s at $350 an ounce, you would have made no money for nearly 20 years when factoring in inflation.

Gold bugs, on the other hand, argue that a 20-year bear market, two decades of sluggish prices, is not the norm and such an example is a poor one to use. Well, excuse me.

In a Nov. 18 Reuters Blog, entitled “The Fed is sending gold higher,” by Rolfe Winkler, he states, “Eventually the value of all paper (money) you’ve accumulated goes to zero. The trick is to turn that paper into tangible assets with tangible value. Gold may be volatile, but at least it maintains its real value.”

Mr. Winkler displays a chart of gold prices covering seven and a half centuries. According to the chart, if you bought gold between the years 1315 and 1765, you did not make money until the mid-1960s.

I assume that means that gold did, during that period, maintain “real value,” but it also suggests it took as long as 650 years to get your money back.

There may be far more coming to the upside for gold since those in step with the market continue to forecast higher prices amid a weaker U.S. dollar. Legendary trader Jimmy Rogers is calling for $2,000 an ounce “soon.”

Another well-known metal trader says gold will hit $3,000 in two years. A third gold enthusiast is on record calling for $5,000 an ounce before President Barack Obama leaves office.

I understand that gold could reach $2,000 an ounce “soon,” or $3,000 within two years. I can accept the theory that $5,000 gold may be seen by the time President Obama leaves office.

And I understand fully the risk involved if I buy gold at this week’s price of $1,220 an ounce that it may take 20 years to get my money back. I am aware of the various scenarios that a buyer of gold faces with prices at historic highs.

But if I buy gold and have to wait 650 years to show a profit, my wife will kill me. I know her well. There is no way she will wait that long.

Editor's Note: Gold closed at $1,808 on July 17, 2020.

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