Just immediately after I warned investors to be wary of gold speculation after it hit record high above $1910, gold price crashed with the biggest three-day slump since October 2008, it fell to as low as $1707 before it recovered. that is eye-dropping 10% down!

I had no crystal ball, neither was this a coincidence. The musical chair game of gold speculation, just like any other financial instruments, is always directed by professional institutional players. Whenever the music stops, those who are left out penniless are always the men on the street. Just as Dennis Gartman wrote  in his Gartman Letter:

“Gold is a trade, gold is a position, gold is volatile, but gold is not safe,” . “The public is involved in gold, and the cab drivers of the world have bought into it. Now they are being taken out, at high cost.”

Gold biggest three-day slump since October 2008 (Source: Financial Times)

Gold advanced to an all-time high above $1,910 as investors sought to protect their wealth against financial turmoil amid speculation that the global economy is slowing.

Yesterday’s news reported “some analysts say it could go above US$2,500 this year.”

I still remember vividly that just before Oil price topped after the middle east unrest, “some analyst say oil price will go above US$300“.

I still remember just before the easy money of silver is over in April, there is an article on Straits Times titled “Silver’s Streak – Price at 31-year high as investors see it as a good hedge against uncertainty”

Now you get my point. Whenever an investment instrument rallies, the news will be flooded with positive views of it. After all, nobody will blame you if you follow the crowd’s opinion. If these comments are just different views, it is still fine. However, many times, news stories are supplied by people who have a vested interest in that particular market.

ETF Chart for Gold, Silver and Oil

In the current volatile market, investors must put their money with eyes open. I have stressed before that price is what the greater fool is ready to pay. Gold does not generate profits, gold does not pay you dividends. If you buy gold today at $1900 today, you must expect someone who is willing to pay higher than the price you have paid for.

There is nothing wrong to change your hard earned money to a piece of metal. In fact, I think Gold should always be part of your investment portfolio, gold appreciation most probably will be here for a long haul. However, how many investors recognize that gold investment is a pure speculative play?

I’ve talked about “Investment market is a reflection yourself“. The question you should ask yourself is not whether you should invest in gold, but how much of your portfolio should be speculative and at what price you should be interest in buying. If you are an investor but join the musical chair game with a group of speculators, when the music stops, you will be the one left out without a seat.

It seems investors with exposure to gold are in it for the long haul. The Gold SPDR ETF, for example, has about 400 million shares outstanding and trades an average of 15 million share daily. That means daily volume translates into less than 4% of shares outstanding, a relatively low total in the ETF industry.

On contrast, The S&P 500 SPDR ETF sees about 25% of its total shares change hands on a daily basis.

Source: ETF DB

What is price? “Price is what the greater fool is ready to pay” (Trading for a living by Alexander Elder)

Recently, I have heard a lot from my clients talking about investing in Gold. Some of them have bought the Physical Gold years back and saw the value soared and some are regretted not buying and eager to jump into the wagon.

There are some “smart” business people started business a few years back to sell people gold with “guaranteed returns”. Companies, such as Genneva Gold and The Gold Label, sells Gold Bullion at a 2% discount to the market price with a buy-back guarantee. To my shock, the scheme seems to be on high demand. I have a client whose friend recently invested in 60kg gold with such company. The value is, based on current price US$1400 per oz, near 3 MILLION US DOLLARS

Where the scheme might sounds too good to be true, it probably is. Such companies was recently placed on MAS alert list.

Given the soaring gold price, it is very difficult for some people to resist such offer and they simply ignore all the early warnings, such as MAS alert list. One can argue that  they are holding physical gold or gold price will never drop in the long run etc.

People are just very forgetful. Lehman Brothers did not collapse over night in Sep 2008. Their financial trouble was raised as early as 2007, but investors were just saying, Lehman Brothers will never collapse, the same faith with Gold.

Don’t get me wrong. I am not against investing in Gold at all, in fact, I am a strong advocate for commodities. However, investor just has to be more vigilant when investing their hard earned money. Diversification is the key.

To me, such scheme is just using new money to pay the old clients, the cash flow problem is foreseeable once the trend reverse. After that, there will be complains, litigation, liquidation,  people crying about losing their retirement fund, etc. Sounds familiar?

Yes, you may still have the Gold, but remember, Gold is just a metal, Price is what the greater fool is ready to pay.