Every investor or businessman hopes to be successful in whatever he is doing. The reality is that only a small number of them manage to attain great success and become wealthy. Many investors have been chasing after their first million-dollar-profit in the stock market. How many really succeeded in doing so? What differentiates the successful investors from the average ones? The answer has to be their mindset and the action they take in response to each situation. Below is an interesting case study on gold investment over the last decade that well illustrates this point.
A Case Study On Gold Investment
In Jan 1980, the price of Gold hit a record high of US$850 an oz. It then declined in a long
20-year bear market to around
US$300 (about 1/3 of its peak value) in 1999/2000. There was little or no interest in gold towards the lower end of the bear market and the reasons for gold price remaining so depressed were –
- The Gold Carry Trade [The gold carry trade works as follows - A central bank loans a bank (sometimes called a bullion bank) some gold. The gold lease rate is usually very low (below 2%). The bullion bank immediately sells the gold and invests in securities with a higher rate of return, such as government long-term bonds (over 5%). The carry return is the return on the bonds minus the gold lease rate.]
- Selling By Central Banks Around The World
- Forward selling By Gold Producers To Lock in Profits
- Follow-up Selling: Any rebound in gold prices were quickly followed by more selling.
- Risk Aversion: Gold investment is perceived as having very high risk and many Fund Managers would not recommend investors to have any exposure in gold. UOB also classified its UOB Gold & General Fund as a high-risk investment product. Many who were caught at the high end of the gold market had to spend years regretting their decision for getting into gold [Much like today’s many S-chips “babysitters” who got caught in the stocks at the high end during the past few years]. Gold investment yielded no return other than capital gain, if any. With the pricing of gold in US$, capital gains could be eroded by any weakness in the US$.
Under such a scenario then, are you able to see any opportunity to make money in gold or any good reason to invest in gold?
It was therefore not surprising that
virtually everyone at that time avoided investing in gold except for those few people [Jim Rogers was one of them] who were able to think out-of-the-box or see beyond what most people failed to see – rather similar to today’s situation where most people condemn or avoid S-chips because of –
a) an immense fear of accounting fraud, mismanagement, cash-not-there, etc,; and
b) inability to differentiate the good from the bad companies; hence, all are considered bad and to be avoided.
What differentiates the few successful gold investors from the others? The answer got to be their positive mindsets and their wisdom and discernment in seeing opportunities when others could not; especially in situations towards the bottom end of a market cycle. Those with positive mindsets would always look for
all the probable ways of making a killing taking into consideration the prevailing risks and rewards of the venture. It does not always require great intelligence to do that. Those who bought into gold then, would likely have taken into consideration the following more common positive factors, among others, in their decision making process.
- Market Cycle: It is a well-known fact that commodity, property, stocks, economy, etc. move in cycles and in different duration. Gold had been in a bear market for about 20 years and at the end of the bear market is always a new bull market.
- Low Risk High Potential Gain: The production cost for gold then was around US$250-US$300 an oz. Prices falling below US$300 would likely result in the closure of many unprofitable mines leading to shortage of supplies and price increases. The downside in gold price at this level could be expected to be rather limited and the upside potential gain could easily be well over 200% [see point 4 below]
- Inflation: US Government debt had been escalating and the value of the US$ had been falling. Inflation was seen as unavoidable and supportive of higher gold price in the years ahead.
- A New Bull Market Always Begins After The Bear Market: A new gold bull market that is accompanied by inflation has a high certainty of seeing the gold prices surpassing its previous record high of US$850. [Old record high surpassed in Jan 2009]. Stock market also behaves in similar manner i.e. if inflation is a factor and the economy recovers well, the STI can be expected to rise beyond its last record high of 3,866 points attained on 11/10/2007, in the next bull market cycle.
- Herd Mentality Never Change: The most important fact is that prices would always be at their lowest level when the public fear or bad sentiments reached their highest level. In other word, the public (the majority) generally, would never dare or want to buy when prices are at their lowest because of the immense fear that prices could drop even lower. If they were wise enough to buy, the prices would not have dropped to such a low level in the first instance.
In 1999, UOB Gold & General Fund was selling at around 40 to 45 cts per unit. UOB Certificate Gold (One Kilo) was selling at between S$15,000 and S$16,000 a kilo. The former hit a high of $2.59 in 2010 while the latter hit a high of around S$74,000 in Sep 2011.
EVALUATION:
The market cycle for gold is a lengthy one. The duration of the bear market of 1980 to 2,000 was around 20 years. With the current bull market for gold already over 10 years old and prices have risen over 5x since the year 2,000, the big money to be made from gold may well be over. For gold to rise 100% from the current level of close to US$1,600, its price would need to climb to US$3,200 – certainly a daunting task and also considering the unattractive risks-to-rewards and waiting time required; besides, there are other investment products offering very much superior and faster returns.
LESSON:
This case study illustrates the need for investors (especially those looking for great returns or to make their millions in investment) to adopt a positive mindset and strive to see beyond what the general public is seeing. Those who are able to do this would likely reap great rewards. However, one needs to bear in mind that high returns are usually accompanied by high risks. Thus, much homework needs to be done and priority be given to taking precautionary measures in reducing one’s investment risks to the lowest possible level [eg. buy only very grossly undervalued stocks with little or no debt, also paying dividends; etc.] 
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