Fool's Gold

Do you remember August 23, 2011? What happened that day? Maybe if you were a Virginia resident you might remember since that was the day a 5.8 magnitude earthquake hit the area. For those wondering, that was the strongest earthquake in the United States east of the Rocky Mountains since 1897. Back to our question though…What’s so important about August 23, 2011?

Investors sometimes have short memories but nothing specific really happened on this day; it’s what was happening that summer that we want to bring back into focus. Since we recently wrote an article about “Sell in May and Go Away” let’s actually go back to that very point in time.  After a positive month of stock market returns in April of 2011, the S&P 500 dropped -1.35% in May, -1.83% in June, and another -2.15% in July.

There were rampant fears across all global stock markets. Worry kept mounting weekly due to the threat of contagion of the European sovereign debt crisis spreading into Italy and Spain. Leading up to the August 6, 2011 downgrade of the United States credit rating from AAA to AA+, we also were preparing for France’s credit rating to be lowered. On August 8, 2011 alone…the S&P 500 dropped -6.7% in one day! September of 2011 also proved to add more fear and negative returns by losing another -7.18%. So…was anything going well? You bet…

Gold climbed to $1,750 an ounce in August of 2011. The shiny yellow metal, historically considered a hedge against the markets and inflation, was not only perceivably providing security but also nearing all-time highs with the greatest of ease. There was non-stop talk about the strength and value of gold. Every media outlet was barking about it and with the equity markets being punished it was clear to most investors that this was the place to be. Or was it?

One other thing actually happened on August 23, 2011.  The following article was written and published:

http://www.myportfolioguide.com/blog/132-brett-arends-marketwatch.html

Once you’re done reading it please understand that this is not meant to “pound our chest” or play the “I told you so” card. It’s stressing the point that “all that glitters isn’t gold”. Can and will it have a place in some portfolios? Sure! We just chose to not hold it when every other radio or television commercial was advertising how ‘now’ was the time to hock your grandmother’s jewelry or convert your entire IRA into gold bullion.

For those of you that are visual learners, a simple chart over that time period up until now can help you see what Gold has done versus the S&P 500 Index.

(CLICK HERE)

Once again, the rearview mirror is always more clear than the windshield. That being said, what awaits us on the road ahead?

At the time of this writing Gold literally slid another 9% for its worst day in 30 years and is now clearly entrenched in bear market territory. Plenty of people have made the wrong call here. Most recently, Bill Gross himself tweeted from @PIMCO “Gross: OK, so I made a bad call at the Barron’s Roundtable. I would still buy gold here. World reflating.“

Regardless of Mr. Gross’ opinion or anyone else’s, we might even start looking at adding gold to portfolios soon. Once the dust settles it would appear to be far more attractive to an investor than it was -24% ago, right?

Many articles that aim to educate an investor will begin with a simple definition of the topic. In this case, we choose to end an article with one so that you’re better equipped to spot the next alluring and shiny object:

Definition of 'Fool's Gold' (from Investopedia)

Also known as iron pyrite, fool's gold is a gold-colored mineral that is often mistaken for real gold. Fool's gold is also a common term used to describe any item which has been believed to be valuable to the owner, only to end up being not so. Investments in hot stocks that seemed too good to be true, only to crash and burn, can be referred to as investing in fool's gold.