James Smith discusses the gold market place

Taxi Cab Advice: When I was a kid, I was told that if your taxi driver ever gave you investing advice about a particular market, then it was time to pull your money out and invest in something else.

This is obviously not a dig at taxi drivers – rather it is a statement about the herd mentality in investing. Over the past 5-years, the biggest investing herd I have seen are gold buyers. Now before you get all upset, I am not saying that gold is a terrible investment BUT gold is not the best investment for everyone, all of the time. Markets go through cycles, gold included. Depending on where the asset is in its cycle depends on whether it makes sense to buy.

Over the past 18-months, gold has under performed almost everything around. In other words, it has been a terrible investment as of recent. Also, people should pay attention to what very smart, well informed investors are doing. In 2007, 22 of the top 25 hedge fund managers were highly invested in gold. Today, many of those same managers, along with Goldman Sachs, are shorting gold (this means that they are betting that it will fall in price).

I was on a plane recently and the person sitting next to me was a staunch metals investor who equated his ownership in metals, and not stocks, bonds or investment real estate, to a badge of honor. If gold were a religion, he would have been the Pope, but even he couldn’t explain clearly why it was a good investment, why it would continue to appreciate, and it should be anything more than just a diversified fraction of his portfolio.

I have heard the arguments that gold is tangible whereas stocks aren’t… Well, most investors don’t invest in physical gold, they own contracts (aka paper). For those who have physical gold, how is that investment different than real estate, water (water rights), oil, corn and other commodities? Some say that if the US tanks, gold will be the new currency. Will it? That doesn’t make sense to me because according to the history books that I read, laborers during the great depression bartered with apples, loaves of bread, live stock and tangibles that people actually needed. I don’t know how filling gold and silver are, but if this country goes to hell in a hand basket, I would rather be a farmer invested in land and cattle, than a retiree with a safe full of metal.

Basically, people need to know that gold IS JUST ANOTHER INVESTMENT and some highly unique asset that is insulated from the greater market. It can, has been and will again, be manipulated by investors. It can, has been and will again at some point, go through a bubble.

Some people point to Chinese consumption of gold as proof that it is a universally accepted asset, but for those of you who are unfamiliar with China, you have to realize that gold is a very important part of Chinese culture. Most Chinese men and women own and wear lots of gold jewelry. Most wedding bands in China are gold only and now that China has a middle class, they are buying gold because of the culture significance, not for the purposes of an investing asset.

Be smart and understand what you are investing in before you invest. And remember, if your cab driver tells you to invest in something, its probably time to turn and run (or short it).