Gold may not yet be in a bubble, but chase it higher at your peril, writes The Motley Fool.
Investors are being whacked from all directions.
In the U.S., politicians are continuing to play silly games over raising the $14.3 trillion debt ceiling before August 2nd.
In theory, the U.S. will default on its debt if the ceiling is not raised, sending markets into a spin not seen since Lehman Brothers was allowed to go bust in 2008. It won't happen of course, but it is adding to the general economic drama of the day.
In Europe, banking shares took a beating as Italian and Spanish borrowing costs hit new euro-era records. With bond yields above 6% in both countries, analysts fear they could reach 7%, a level widely considered unsustainable.
Happy gold bugs
The flight to safety took on new proportions, with gold rising above $1,600 an ounce, its 11th consecutive day of gains, the longest rally in 31 years.
The gold bugs are having a ball. Generally pessimistic in nature, rather than celebrating their wealth, they'll now confidently be predicting economic and monetary Armageddon is just around the corner.
At least it makes them feel good, for the time being, although one can't help but think they'll only really be happy when gold is trading at $5,000 an ounce, the world's banks are all bust, paper money no longer exists, we have rampant inflation, and we all have to live off rations of baked beans, tomato soup, potatoes and bread.
Each to their own. As you may have guessed, I'm not a huge fan of gold as an investment.
Charlie Munger, Warren Buffett's sidekick, thinks the same, saying in September 2010…
"…I don't see how you become rational hoarding gold. Even if it works, you're a jerk."
No ambiguity there from the billionaire Munger. Like Munger, we prefer investing in individual stocks rather than buying a very heavy yellow metal that has no utility.
Of course, in times like this, with world stock markets on the nose, the last thing investors are thinking about is buying individual stocks, unless they are piling into gold stocks like Newcrest Mining (ASX: NCM), Kingsgate Consolidated (ASX: KCN) and St Barbara (ASX: SBM), for example.
Move aside carbon tax
All this doom and gloom, and the dash to gold, hasn't stopped some companies going on a buying spree.
BHP Billiton's (ASX: BHP) $15 billion bet on rising energy prices with its purchase of Texas shale gas producer Petrohawk.
Hanlong Mining of China's proposed $1.4 billion bid for iron ore junior Sundance Resources (ASX: SDL).
Santos (ASX: STO) agreeing to buy NSW coal-seam gas player Eastern Star Gas (ASX: ESG) in an all-share deal valued at $924 million.
What carbon tax?
Tough times ahead
Back on terra firma, the non-mining economy is clearly struggling, as emphasised by David Jones' (ASX: DJS) dramatic, rapid and unprecedented deterioration in trading.
Investors, already facing a stock market down close to 10% from its April highs, might not be out of the woods. The Australian Financial Review says…
"Investors could be facing the toughest reporting season since the end of the global financial crisis…"
It could be that Westpac's (ASX: WBC) chief economist Bill Evans is right that interest rates will be cut by up to 1% over the next year. I wouldn't bet against it.
No silver lining
But, not every interest rate cut has a silver lining, with Westpac also predicting unemployment could rise from 4.9% now to 5.7% next year.
No pain, no gain.
On the bright side, if all that were to pass, the AUD would weaken, manufacturing might pick up, inbound tourists won't find our country so damn expensive, and stock prices might rise.
If only the future were so clear.
As stock markets wobble and the gold price heads to the stratosphere, it's tempting to bail out of the former and pile into the latter.
Gold bubble? Not yet.
And who knows, the gold price could be headed even higher. Bubbles have a habit of getting bigger and bigger than you could ever have imagined, and gold arguably isn't even in bubble territory…
Gold $2000 anyone? At the rate we're going, it feels like we'll be there before the end of next week.
I wouldn't bet for it, but nor would I bet against it. Instead, I'll just keep on concentrating on searching for good companies trading at cheap prices.
Call me naïve, call me a Motley Fool. Warren Buffett has made an investing fortune being greedy when others are fearful. If it's good enough for him, it's good enough for me.
Of the companies mentioned, Bruce Jackson has an interest in BHP Billiton and Westpac. The Motley Fool has a golden disclosure policy.