Gold Bugs vs. Gold Investors: What's the Difference?
Assumptions are more common than the truth...
And that's not commentary on “fake news” or other modern phenomena. It's instead a fact of the human condition.
The human brain has an amazing ability to fill in missing information in any given scenario where 100% of the information isn't present. In other words, it can make assumptions. And your brain is pretty good at it, too.
One way it uses this skill is by creating logically complete arcs in stories. For instance, if your spouse tells you they drove to the supermarket, you can assume they took the keys to the car. And you'd probably be right.
For the most part, our assumptions are correct. The entire world had assumed that the sun would rise this morning. And the entire world was correct. But being correct about our assumptions most of the time has a downside...
We're correct about most of our assumptions. So we tend to believe that we're correct about all our assumptions.
And that's where we can get into trouble...
The Gold Investor's Burden
Whenever I bring up gold in a conversation about investing, people often make a major incorrect assumption about me: that I'm a gold bug.
But the truth is, I'm not a gold bug. I'm a gold investor. And there's a big difference.
In short, gold bugs and gold investors own the metal for different reasons.
Gold bugs own gold mainly as a hedge against social and economic collapse. Gold investors buy gold to hedge market downturns and profit from cyclical price upswings.
But there's more to it than that...
A “gold bug” is generally perceived as an antisocial, largely paranoid ultraconservative who wants nothing more than to see the return of the gold standard.
But a “gold investor” seeks nothing more than to hedge and profit from the cyclical movements of the market. They'll sell their gold for an acceptable return.
I'm the latter. And as an investor, I'm looking at dozens of mining stocks that have been oversold as a result of the worst negative sentiment surrounding gold in years...
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2018 hasn't been kind to the gold market. Year to date, the price of gold has lost a little over 7%. As a result, gold mining stocks have taken a steeper dive. VanEck Vectors Gold Miners ETF (NYSE: GDX) is down by almost 13% for the year.
As a result, negative investor sentiment surrounding gold has built up all year. Just a few weeks ago, Commitments of Traders (COT) reports showed that this is the largest open short position on gold in history. Some media outlets are even questioning gold's safe haven status. But the gold market isn't as bad as most investors seem to think it is.
Yes, the price of gold has lost 8% for the year. But this loss is nothing compared to the drop in gold prices in 2013. During the first eight months of 2013, the price of gold was down by 16%. And the yellow metal ended the year some 25% lower.
The truth is, the price of gold has slowly been on the rise since late 2015. A pullback in prices should have been expected eventually. But go ahead and try to tell investors that right now.
Regardless, gold mining stocks have been generally oversold. And investors should take notice.
Gold mining isn't too different from mining anything else. The goal is to mine a product that you can sell for more than it costs to produce. Gold miners don't care about conspiracy theories or survivalism. They're only looking to profit.
And real gold investors should follow suit.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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