Warren Buffet espouses that it’s important to be fearful when others are greedy and greedy when others are fearful. This contrarian view has made him one of the most brilliant investors of our time and revered around the world for his approach to the financial markets. This golden rule of investing encourages investors to take the emotions out of the decision making process, and “swim” against the current when the economic waters are choppy. Such behavior in 2003 and 2009 coming out of recessions served equity investors well.
But, sometimes it’s important to recognize the other side of the trade and be fearful that an asset bubble can burst. The dot-com bubble and the real estate meltdown remind us of how far greed can inflate asset prices and the massive price declines that occur when those bubbles burst. Gold sits on a similar precipice as we head into the fall. Gold prices have made their way onto the headline screen of every financial website and newscast. As an almost opposite of equity prices, gold has soared as investors are worried about the global economic outlook.
Although worldwide demand for gold is down 17 percent from a year ago, new investors are flocking into the metal. According to Scott Carter, CEO of Goldline International, gold purchases at his company have increased 20 percent since the recent S&P downgrade on Aug. 7. Radio and web ads are fanning the flames of fear, encouraging new investors to buy coins or bullion. Exchange-traded funds that track precious metals have experienced record inflows and make it easier for investors to buy gold in their IRA or investment account.
Gold’s recent price gains reflect the fear that investors have about the deceleration of the U.S. economy, uncertainty of the Euro zone and lack of confidence in our own government. That doomsday concern has driven prices up dramatically further inflating the bubble. We encourage our clients to remember Buffett’s golden rule and temper that fear to avoid peril when that bubble finally bursts.