Precious Metals: Perhaps they’re a little too precious after so much hype
There has been no shortage of interest in the precious metals lately. The other week I was out to breakfast with my grandpa and we got to talking about the stock market. He was impressed (and incredibly confused) by my iPhone’s ability to get real-time quotes. Anyway, out of nowhere, a middle-aged man in the booth behind asked, “what’s silver doing?” I responded that it’s trading at $38; he was thrilled because he sold at $48.50.
Later that week, I cracked open Robert Shiller’s Irrational Exuberance—such a great book. Much of my commentary in this post stems from his work. While reading, the words on page 68 jumped out to me. Shiller writes:
“Near the peak of the market, around 1999, it seemed that conversations about the stock market were everywhere. I used to play a game then with my wife: when we went out to a restaurant to eat, I would predict that someone at an adjacent table would be talking about the stock market… Bringing up the stock market was seen then as an accepted, even mildly exciting, conversational gambit.”
See some similarities between his story and mine? Shiller goes on to argue that public attention to the market is an “amplification mechanism” for irrational exuberance. It helps drive speculative bubbles. In his defense, the guy that asked me about silver did so after margin hikes and the precious metal’s dramatic sell-off. However, this man isn’t the only one around me suddenly interested in silver and gold. Monex commercials are everywhere and CNBC provides ample coverage on the matter. Everyone wants a piece of the action.
Now, I’m not saying that gold and silver aren’t going to continue their trek higher. With all this momentum, precious metals will likely continue the climb—perhaps even for several more years. Even at multi-decade highs, gold is still below its all-time inflation-adjusted high. However, before you join the silver or gold bugs and load the boat with American Eagles, GLD and SLV, ask yourself: am I buying this for a rational reason and at a reasonable price or simply because of buzz that it’s going higher?
There are, of course, fundamentals driving this rally. Yes, there’s a global race to devalue currencies. Yes, there’s general unrest and fear following the 2008 recession. There are always fundamental causes for powerful market moves. In 1999, the stock market was anticipating a “new era” filled with widely successful dotcoms. During the real estate run-up, eager home buyers cited a huge imbalance between supply and demand. Because of these fundamentals, it seemed that no price was too high for dotcoms and housing. We know where that mentality led us.
Is this where we are with precious metals today? I don’t know for sure, but I think it’s worth consideration. While you contemplate this, check out Warren Buffett’s about gold on CNBC if you haven’t seen this video already. Buffett gets a little frisky when he starts talking about his 67 foot gold cube.
The full version can be found here and I recommend watching it. Enjoy!