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Nobody, not even those at the top of the Wall Street food chain, knows for sure which direction an investment is going at any given time. I suppose there are a few exceptions to that rule, but most of them are in some stage of the federal corrections system. Yet we keep desperately chasing an answer to the up or down question like pilgrims searching for the fountain of youth. The quest for certainty is ingrained in human nature. The problem is, that it leads to horrible investment decisions.
The real question is not whether it’s going up or down, but rather what is the relative risk vs reward of owning an asset at a given time. Most analysts would have enthusiastically agreed that residential real estate was “going up” in 2005. If you were making your buy/sell decisions based on that general sentiment, you’d have been making offers on every house on your block. If on the other hand, you had asked yourself about the relative risk versus reward of speculating on real estate at that time, you may have seen the bigger picture: prices were incredibly high and the system was rotting from within.
It’s this need to buy a sure thing, the need to know our investments are going to go up, that leads us to buy high and sell low, which is exactly why most individual investors lose money over time. The higher prices go, the more confidence we have that they will continue to rise. It’s like going to the racetrack every weekend and seeing the same horse win every single time. After a while, you’ll start to gain confidence that history will repeat itself. You’ll believe that the horse is likely to win again. You’ll believe the horse can’t lose. You will feel confident betting on him.
The problem for investors is that assets are not like racehorses. The more an asset “wins” or increases in value, the less upside it should theoretically have. The longer it has been growing, the more likely it is to begin falling. All investments are cyclical and will rise and fall. Often times, the more they rise the further they fall. Unlike the horse, an investment with a recent track record of perfect performance, the very track record that gives us confidence, can mean that though it may look good, its’ risk vs reward should be telling us to stay away.
This is the reason most individual investors will miss the current opportunity in gold. Most of the investors I have spoken to recently believe gold is going up eventually. They believe the money printing, government debt, and shaky financial system all point to higher gold prices. But they are not seeing the horse win every race, so they don’t have the confidence to buy. Many of them poured into the market at $1800 per ounce, but can’t bring themselves to pull the trigger at $1285. That’s insane, but it’s human nature.
This is the clearest and simplest gold market we have seen in years. Right now gold is barely $50 per ounce above its 2013 floor around $1226 which is one of the most significant support levels I have ever seen. It would take a very meaningful event to drive gold down more than $50 per ounce. That’s your risk. With the high and unsupported stock markets, massive underlying inflationary pressures, increasing Asian physical demand, decreasing mining exploration, and a potential war in Eastern Europe, the upside could be many hundreds of dollars per ounce. That’s your reward. Stop trying to pick winners at the horse race and instead do the math. The thing about great opportunities is that they are very hard to see. That’s why the vast majority of people sit quietly while those opportunities pass them by.
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