Gold Rush or Fool’s Gold?

During the old gold rush days of the 1800s, most speculators and enthusiasts went belly- up. It’s true that the prospectors first on the scene amassed huge fortunes, but also that many who ventured into the heartlands of the Sierra Nevada, the Cariboo, and the Klondike lost their shirts, and occasionally their lives.

A few weeks ago, Benj Gallander, the president here at Contra the Heard Investment Newsletter, was approached by a gentleman who excitedly proclaimed, “Gold will be at $10,000 before the end of this decade!” This view is becoming common in some circles. Headlines speak about the worries of the world every day, and it’s often claimed that gold is the only safe haven left.

If this gentleman is only half correct, the recent sale of Contra’s last gold mining company, Richmont Mines (RIC – AMEX, TSX) will have been premature. However, the gold trade is becoming more crowded by the day, and the psychology looking more and more mob-like. Then too, many insiders at companies in this sector are now selling, and that’s rarely a good sign for the bulls. Perhaps gold will “only go up,” but experience should tell us that often when these words are spoken, it means rather that a mania is about to crescendo.

Certainly there are reasons why gold may continue its upward trajectory. The sovereign debt issues in Europe, the deficit here in the United States, and the devaluation of paper currencies around the world all suggest huge problems with the current monetary system. It’s possible that a new gold standard, or a commodity standard based on a handful of precious metals, could emerge. However, even if this situation did come to pass, it still wouldn’t ensure gold’s continued growth, as the number of variables that would affect its valuation is enormous. Investors and speculators in the gold market should proceed with caution, and above all remember that a healthy dose of contrarianism is critical in order to remain objective.

As in the gold rush days of old, the successful prospectors in today’s gold market arrived long before the crowds, and have now been here for years. The similarities between the masses today piling into gold and the throngs who braved the Chilkoot Pass to partake in the Klondike Gold Rush may be closer than we’d like to believe, though history has yet to prove or disprove the similarity. Regardless, the odds of striking it rich via the gold trade are becoming less and less favourable. At some point, the shining metal could easily become fool’s gold.


Benj Gallander is co-editor and president of the Contra the Heard Investment Letter and Philip MacKellar works as an equity analyst. Contra has a 10-year annualized return of 19.6 per cent.