Gold Mania? Not Quite

After 20 years of only allowing straight price or mostly negative gold reports, the WSJ has finally realised what the really smart money has known for 10+yrs. Gold beats stocks when volatility is high. Gold is up over 400% in the last 10yrs where as the DOW and SP500 have gone nowhere, and this has been achieved without any significant retail investor demand. The end price for gold is not even in sight.

From the Wall Street Journal:

Associated Press

The conventional wisdom on Wall Street is that the gold bubble is about to pop.

After all, people will tell you, the little guy is now totally on this bandwagon. Ordinary Mom and Pop investors from Bakersfield to Boston have dumped their stocks and poured their money into gold coins and bullion funds. It's a mania–just like Nasdaq '99, real estate '04, gold '10. Look at all the TV commercials. Look at these new gold coin vending machines. Everybody knows that when the ordinary public get into a boom, the smart money gets out. Right?

I decided to check out the facts on this urban legend. And they may surprise you.

How much have ordinary Americans actually invested in gold this year?

According to Financial Research Corp., a Boston firm which tracks the data, investors poured $7.4 billion into gold bullion through exchange-traded funds from the start of the year through the end of July. Nearly all of that went into State Street's SPDR Gold Trust.

But a lot of that money came from big institutions like pension funds, hedge funds and mutual funds. According to State Street, these account for at least 45% of the investment in GLD these days.

So individual members of the public probably accounted for only about half the new investment, or $3.7 billion.

The public has also been buying gold coins and bars. According to GFMS, Ltd., the London-based consultancy that produces the most authoritative figures, U.S. investors bought about 45 metric tons of gold bars and coins in the first half of this year. This is less than they bought last year.

Based on prices in the first half, that maybe accounted for another $1.7 billion or so of investment.

Grand total: The public bought about $5.4 billion worth of gold.

But the story doesn't end there. At the same time, others were selling gold. Lots of it. I was walking through the mall on Saturday when a young woman came up to me, thrust a plastic bag and leaflet under my nose, and asked me if I had any old gold jewelry to sell. The company she worked for would do a deal on the spot.

This is a new twist on a well-established business. In every major town there are stores that do a busy trade buying and selling gold. As the price of gold has risen, more and more people have been ringing the bell. In an economy like this, where so many people are struggling, it is a tempting offer.

How much has been sold? Nobody knows for certain. But GFMS says the figures so far are about 10% to 20% higher than last year. Some very rough numbers suggest sales through the first half may have come to about 70 metric tons or so–worth maybe $2.7 billion.

So if individualsbought $5.4 billion worth of gold, and sold about $2.7 billion, their total net investment comes to $2.7 billion. These are the figures through early summer: July for the bullion funds, end of June for the physical gold.

Are these bubble levels? Is the mania near its peak?

Try this. Through the end of July, according to FRC, investors poured $22 billion into emerging markets mutual funds. And a remarkable $155 billion into bond funds. Compared to these figures, the amount invested into gold is chickenfeed.

But it's a tiny share of retail investment this year. It's hard to call it a public mania.

And what about more recently, as the gold price has surged? Once again, the figures are surprising. The total ounces of gold held by the GLD has risen just a couple of percentage points since July. GFMS says that gold coin sales had a weak third quarter here in the U.S.

What this means next for gold is another matter. I'll repeat my own views on this. While I am deeply skeptical of gold as a long-term investment, I recognize that it is in a secular bull market and I suspect it may be the next fully-fledged mania. Currency debasement is a theme unlikely to go away any time soon.

I keep hearing everyone tell me gold is so over. But I don't know many people who actually hold much in their own portfolio. I'd find it easier to believe gold was totally over if no one was saying it and everyone was bragging about all the gold coins they held.

Where does this leave you, the investor?

The gold price has had a great run in the past few weeks - ever since Ben Bernanke warned he might print dollars to buy up more government bonds. And the latest news from the options and futures market suggest it may be due for a pullback: According to Kasper Kirkegaard, a commodities analyst at Danske Bank, speculative betting on a price rise is now near record levels. That usually precedes some kind of reversal. Proceed with caution–as usual.

If you want to play this bubble and you think it has a long way to run, but you want to minimize your risks, one smart way is to buy "out of the money" call options. They're like a long-odds bet on a price jump. That gives you plenty of upside in a boom with small risk. Building positions in stages, instead of jumping all-in at once, remains the way to go.