Why your should listen to 5,000 years of history...

Highlights in this issue:

*** Will a dead cat really bounce....?
*** The oldest form of protection...
*** Buy gold without having to store it... and more...

From Gary Booysen on the top floor...

Dear Investment Academy Reader,

Last week, we looked at diamonds; this week it’s time to look at a gold play. Although these two are probably the most traditional forms of wealth (by that I mean the most likely items you’d discover in an 18th century pirate treasure) in the world of investing, they couldn’t be more different.

Diamonds are great if markets are running up. But, when markets throw themselves into reverse, and the markets have been wobbly for the last week or two, gold is the only bet to make. Could the massive bull from the last couple of months be petering out? Remember, after the great crash in 1930 the markets went on to rally 30% before plummeting to new lows. It’s what’s called a “dead cat bounce”.

Wikipedia says: “A dead cat bounce is a figurative term used by traders in the finance industry to describe a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement.” Investopedia is perhaps more enlightening when it says: “Ever heard the saying, ‘Even a dead cat will bounce if dropped from high enough!’?” And when you’re falling from that high...

I believe it’s quite possible the next fall’s around the corner if you consider our appalling fundamentals. South Africa’s GDP dropped for a third straight quarter, shrinking by another 3%. Where should you put your money if we’re going to see a market crash? It’s quite simple really...

Protect yourself with gold

In a mad spiralling panic, people run to gold. It’s irrational. After all, gold has no intrinsic value. You can’t eat it and it doesn’t produce anything. But, it does serve as an excellent means of exchange. It’s durable, measurable and found in small enough quantities that a tiny amount of it can represent a decent amount of goods. It’s a traditional form of currency and, as such, the yellow metal has gained a lingering magnificence. When people exhibit an “irrational exuberance”, they long for simpler times and rush back to what they know. The problem, of course, is it becomes a self fulfilling prophecy. As the fearful run to gold, the greedy follow. Speculators know fear will drive up the prices, and they themselves pour cash into gold. The secret is to get in first.

The easiest way to get into gold

New Gold (JSE:GLD) is an exchange traded fund (ETF). It’s 100% backed by gold. If you don’t want the hassle of actually holding physical gold then this might be the route for you. For every “share” you buy, New Gold buys and holds the equivalent amount in physical gold. This means your investment tracks the gold price exactly. But when I say “track the gold price” I mean the rand value of gold, not the dollar denominate price.

This means you can’t just watch the gold price and think you’re making the equivalent gains with your ETF. New Gold is listed on the JSE and is denominated in rand whereas the gold price is quoted in dollars. You’re also assuming the “currency risk”. If the dollar weakens, all other things being equal, then the gold price – in dollars - will rise. This is because it takes more dollars to buy one ounce of gold. The value of gold – in relation to everything else, as well as your ETF – hasn’t changed.

Until next time – keep learning!

Gary Booysen
For the Investment Academy