Should Gold Be Sold?
Pinank Mehta
Gold and silver especially have had a steep correction over the past week. Silver has corrected from about USD$8.50 to about US$6.95 which is a correction of about 20% while gold has corrected by about 7% from US$426 to about US$395
Such a steep fall has many people worried sick causing a lot of angst at not having sold in spite of the timely warnings of so many knowledgeable people writing on gold and silver.
My experience (however limited) in the markets might be of some help in assessing the situation in a larger perspective. I had invested in the infotech stocks boom in India between 1997 and 2000. Primarily I had invested in a stock called Silverline Technologies (which was a speculative company) at a price of about Rupees 20 in June 1997. I had identified a primary uptrend in this sector but chose a lower quality stock, thinking I would end up making more money on this than an investment in a staid blue chip like say Infosys Technologies!
Subsequently the price moved up as I had anticipated to Rupees 133.70, amazed at my genius in investing. Now unfortunately, the markets have a very nasty habit of puncturing inflated egos and very efficiently at that! So the stock promptly cratered to Rupees 46 between June 1, 1997 and June 24, 1997! Thoroughly humbled and chastened, I watched the value of my investment shrink (along with my ego) by a whopping 65%! However I never considered selling since the fundamentals did not justify my selling and the reasons for which I had bought had not changed.
Then the stock again took off and hit a price of Rupees 392.85 on March 23, 1999 from where it corrected by 55% to Rupees 176.95 (Refer to graph below). This rise and fall was again accompanied by similar sentiments described in the earlier rise albeit muted this time! From there the stock took off and eventually hit a peak of Rupees 1376.85. I had however bailed out much earlier with a "reasonable" profit, sensing a mania and extremely alarmed at the prevalent greed as common sense took leave of the masses and the "experts" in the finance industry in the "New Era".
Corrections in Silverline Technologies' stock (on the Indian Market) in 1998 and 1999
There was a similar movement in the stock of Infosys Technology. However the corrections were far less violent as the following table and graph will illustrate.
Corrections in Infosys Technologies' stock (on the Indian Market) in 1998 and 1999
Please note that all prices are adjusted for stock splits.
Presently Infosys is still doing well but Silverline has become a penny stock!
The morals of the story being :
- Large corrections in primary trends (bull or bear) are common in all markets in all asset classes. We must stay the course as long as the fundamental reasons have not changed. A change in the fundamentals alone warrants a liquidation of positions.
- I avoid trading and churning since I have interests in my professional life other than just buying and selling as an end in itself. Additionally, I am not so smart to keep calling the turns correctly, and I am worried that I might trade myself out of my positions prematurely.
- I subsequently learned that a blue chip company is less volatile, far more gentle on my stomach lining, and better for my sleep. The speculatives should be picked up later in the cycle. I invest so that my speculative investment is written off (subsidized form earlier profits) avoiding the unnecessary heartburn.
- The earlier corrections in a primary bull trend are designed to shake out the non-believers, traders, and the weak bulls. Conviction in the reasons for the existence of the primary trend helps us keep our mental balance and our positions.
- Lastly I avoid monitoring my net worth on an hourly or daily basis. Weekly (if you are compulsive) or monthly is a better frequency. I spend my time instead on tracking the market fundamentals always searching for that change in fundamental conditions which would then prompt me to begin liquidating or adding to my positions.
Incidentally NM Rothschild is exiting the gold business of which they were active participants for the past 85 years! Rothschild's withdrawal from gold is part of a complete retreat from the commodity trading business. Baron David de Rothschild, Chairman of the bank, says: "It is clear that the revenues we have generated from commodities in comparison with those from investment banking, banking, and those we think we can generate from private banking have definitely declined."
This is as great a signal as any to contrarians and increases my conviction in the primary bull trend of the commodities and the precious metals markets.
Pinank Mehta is a director with Métier Capital Management Pvt. Ltd. advising on wealth management. He can be contacted at métier@bol.net.in
India,17 April 2004
Metier Capital Management Pvt. Ltd. is not a registered advisory service and does not give investment advice. Our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While we believe our statements to be true, they always depend on the reliability of our own credible sources. We recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you to confirm the facts on your own before making important investment commitments. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Metier Capital Management Pvt. Ltd. recommends that investors independently evaluate particular investments and strategies. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
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