 The Public Has Yet To Discover Gold
Todd Stein & Steven McIntyre
The Texas Hedge Report
May 3, 2005
Courtesy of www.texashedge.com
According to various sources,
Berkshire Hathaway lost $310 million in the first quarter of
2005 betting against the U.S. Dollar. This $310 million loss
generated a plethora of headlines over the weekend about Warren
Buffett's "failed" bet against the U.S. Dollar. Just
by chance, we decided to click on the top news headline on yahoo.com
and we were taken to a Reuters article titled "Berkshire
Loses Currency Bet." At the bottom of most articles
on the Yahoo! website, there are sponsored links from advertisers.
One link that caught our attention was an advertisement from
a currency trading website called fxcm.com. Your authors are
not currency traders, and we have never heard of fxcm.com, but
that is beside the point. What is important is that, for the
first time in recent history, currency trading has gone mainstream.
For most of the 1990s, mom
and pop investors learned how to surf the Internet. By the end
of the decade, almost every major portal website such as AOL,
Yahoo!, or MSN had banner advertisements from sponsors
such as Datek, E-trade, Ameritrade, Schwab and TD Waterhouse.
Tens of millions of Americans would wake up every day and get
bombarded with ads from various online brokers. You couldn't
get a sports score or check a stock quote without seeing an ad
for "free real time quotes" or "$8 online trading."
Combine this new distribution phenomenon with a skyrocketing
stock market, and Americans started trading online in droves.
As the NASDAQ imploded and
the housing bubble took its place, links to E-trade & Schwab
were replaced by advertisements for LendingTree.com & E-loan.
By this time, nearly every American had a web connection at home
or work. With interest rates coming down and FICO scores becoming
as American as apple pie, online loans started to take off. All
you needed to do was spend a few minutes typing in your personal
information and thousands of dollars could be yours via a cash-out
refinancing or home equity loan. This trend still continues today.
The Dollar decline over the
last two years has become a topic to be discussed at cocktail
parties. Ask someone if they have plans to travel to Europe and
they will reply, "I wouldn't go there today because our
Dollar is worthless." Just a few weeks ago, an image of
a shrinking Dollar graced the cover of Newsweek. So it is only
appropriate that mom & pop investors get the chance to take
advantage of fluctuating currencies by entering the forex trading
game. The advertisement for fxcm.com is just the first sign of
this trend.
In addition to interest in
foreign currencies, the weak Dollar has increased the popularity
of online commodity trading accounts. You cannot go a day without
seeing a Lind Waldock commercial on CNBC. Nor can you go a day
without hearing about "peak oil." The public
understands oil better than other commodities because everyone
has to fill up their tank with gasoline. A weekly trip to the
gas station and glancing at fuel prices is no different than
a weekly glance at the business section to check stock prices.
Take a look at the charts of most oil companies' stocks and you'll
see that massive amounts of money have moved into energy over
the past year.
This brings us to gold and
silver. These two precious metals are commodities, but also have
monetary value as well. Since biblical times, gold and silver
have been used as money. Until the 1970s, the U.S. Dollar was
literally as good as gold. When Richard Nixon declared that the
Dollar would no longer be backed by gold, the Dollar price of
gold skyrocketed to unimaginable levels. In fact, there was one
point in time about 25 years ago that one could purchase the
Dow Jones Industrial Average (currently at 10,000) for just one
ounce of gold. Back then, any investor who wanted to buy gold
either had to purchase coins, bars or futures contracts.
Since 2001, a new bull market
in gold and silver has begun. While the price of gold has gone
up almost 75% since then, the prices of most gold mining stocks
have gone up four or five fold. Yet even with this great bull
market taking place, those who want to purchase gold itself (rather
than a mining company's stock) still face hurdles. Sure you could
walk into a coin shop (most of these are extinct) or jewelry
store and pay up for a few coins. And you could even buy shares
in an exchange traded fund linked to the gold price. But as far
as purchasing physical gold, there is no equivalent to E-loan
or Ameritrade. When you visit Yahoo.com or MSN.com, you will
not see an advertisement for buying gold coins. The only place
we have ever seen ads for gold coins on a regular basis (not
including financial sites) is on conservative websites
such as newsmax.com. Once the public catches on to the gold bull
market, expect to see advertisements for coins continue to pop
up. As the gold price explodes, we expect to see online coin
shops advertising on MSN.com or CNN. At that point, it may be
a good time to sell.
May 3, 2005
Todd Stein & Steven McIntyre
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Todd Stein
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