Acting Like a Fool No Longer Surprises Me

Rising investment interest in gold reflects investor doubts, while falling interest in bonds is a reminder of how foolish the market can be.

In this, my final column for 2010, I wanted to compare and contrast two important markets that I think give us some indication about what to expect in 2011. As longtime readers may be able to guess, I am talking about gold and bonds. A demanding answer First, on Dec. 13, Dennis Gartman shared some gold data that I think tells an important story.

Back in the early days of the gold bull market, I remember arguing with people that, in my view, gold prices would be driven by demand for the metal as an investment, not by interest in using it for jewelry.

In all the world, just two swimming pools' worth of gold?

In the wake of the tech-stock bubble bursting, I knew that, once it became clear the Federal Reserve was going to try to print money as a way out of that mess, the dollar would have problems and gold would be a beneficiary.

Of course, as the real-estate bubble inflated, leading to an even larger disaster, there was no question that even more money-printing would follow. This bolstered the case for gold. Thus, my argument was always based on investors being the drivers of the gold bull market. From baubles . . . That, in fact, has been the case. But I was still surprised to see just how potent investment demand has become. According to Gartman (the data likely originated with the World Gold Council), in 2000, investment demand accounted for approximately 2% of demand for gold, while about 80% of demand came from the market for gold jewelry.

By 2005, the jewelry share had declined to about 60%, while investment demand had risen to about 20%. Nowadays, jewelry usage is about 40% and investment demand is just over 40%. (Gold also has industrial and other uses, which accounts for the remainder of demand.)

As Gartman notes, "The ETFs are having their very real impact."Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=d11d89ae-0986-457e-988c-3cdef2307d8e,df504df7-5a68-4de6-a0b8-67b1f8abb6d4,8418eaf9-383c-4592-9686-ea783aee0010,8cac0145-59d4-4fff-9f55-c17127c2af01,33a759df-2749-45af-92cb-a170072a44c7,20de2546-3510-4b8b-8f07-77a7ae37ea10,c4b10d9b-07c4-4088-8b50-a0905af22e9a,b555a6b6-d027-42dc-a88a-e85861bca8b3,0fa027b2-0056-4f4f-ade1-b8daa3fd6630", "player.fr": "iv2_en-us_money_article_16x9-xxx-xxx"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=d11d89ae-0986-457e-988c-3cdef2307d8e,df504df7-5a68-4de6-a0b8-67b1f8abb6d4,8418eaf9-383c-4592-9686-ea783aee0010,8cac0145-59d4-4fff-9f55-c17127c2af01,33a759df-2749-45af-92cb-a170072a44c7,20de2546-3510-4b8b-8f07-77a7ae37ea10,c4b10d9b-07c4-4088-8b50-a0905af22e9a,b555a6b6-d027-42dc-a88a-e85861bca8b3,0fa027b2-0056-4f4f-ade1-b8daa3fd6630;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4'); However, that is not quite accurate. The gold-based exchange-traded funds themselves aren't what made such an impact. It is the investment demand that has had the impact; the ETFs are merely the conduit by which much of that demand is expressed.

What is really remarkable is that with investment demand at 40% of gold production, the number of gold bulls with any substantial allocation is still minute. . . . to bubbles? Perhaps by the time this bull market has run its course, investment demand will approach 100% of annual gold production, though we can never forget that nearly all the gold that has ever been produced (enough to fill just two Olympic-size swimming pools) is still in existence. So it's not just the gold that gets dug out of the ground each year that is available for sale, but potentially almost all the gold in the world.

Of course, someone who has bought gold would need a reason to sell it, with some sort of financial prudence on the part of governments and central banks being the most likely catalyst. But as readers of my column (at least) should know, we are still millions of miles away from that. It can't be bad news, so it must be good As a lead-in to my second point, I wanted to comment a bit on Best Buy (BBY, news, msgs), which announced its results Dec. 14. Not only did the electronics retailer miss estimates, but it was also forced to lower guidance prospectively, as demand has not materialized the way the company had hoped.

As a consequence, its stock price was smacked for 15%, although the market itself impressively fought off more rising bond interest rates to close about even (the Dow Jones Industrial Average ($INDU) closed with a 0.4% gain).

Normally, I would have expected the major indexes to take a bit of a licking on that news, as Best Buy has always been deemed to be a well-run retailer and a good barometer of business (especially at this time of year).

However, the denial currently runs so deep regarding what is next for the economy and the stock market that, apparently, the bulls were able to convince themselves that somehow Best Buy's results were company-specific. Thus, businesses associated with Best Buy, which in the past would also have been sold in sympathy, were given a pass. It is quite similar to the treatment we saw when Cisco Systems (CSCO, news, msgs) reported its results Nov. 10.

I mention those two companies because they, as well as others, illustrate a consequence of government money-printing. The additional liquidity goes where it goes (usually into stocks, since the Fed's low-interest-rate policies make more conservative alternatives less attractive), psychology gets deranged and nonsense passes for knowledge.

The net effect is to increase the riskiness of stocks generically, as "normal" market reactions become suppressed, creating an unhealthy environment. Treasury misery loves company A variation of that same theme seems to be what has stopped the bond-market rout from being regarded as bad news.

Apparently, a school of thought has "evolved" that the decline in the bond market is not about the Fed losing control of the printing press, as I have maintained, but about economic activity surging. Thus, the weakness in bonds is (supposedly) good news.

How anyone can conclude that, given the data, I don't know. But even if you agree, you can't escape the reality of higher rates.

So if you really think that bond weakness is linked to the economy catching fire, and you extend that argument out, then you should be expecting even higher rates and more inflation, though the latter is certainly not on the radar of any such Pollyannas. Bond market bravery: 'It's only a flesh wound!' Recently, I headlined a column at FleckensteinCapital.com (subscription required), "Party Like It's 1999, Part III," and that is how the equity market landscape looks to me.

After living through the stock and real estate bubbles, you'd think it would be impossible to be surprised by how foolishly people can act. But with the amount of machismo, bravado and downright cluelessness that I see on display, I must admit I am dumbfonded.

Sadly, it seems that the vast majority of Wall Street types have learned almost nothing from the near-death experience they had only two years ago. My guess, though, is that 2011 will reacquaint them (again) with the fact that financial assets can cost you a lot of money.

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.More from MSN Money

Say goodbye to the bond bull market

10 reasons the bond crunch matters

Fed's power of the press hits limit

The new market norm: Volatility

Who needs dollars when we have gold?

Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=7.380952; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=84;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board MSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Contrarian Chronicles ArticlesSay goodbye to the bond bull market  12/10/2010Fed's power of the press hits limit 11/19/2010Who needs dollars when we have gold? 11/12/2010More . . .Contrarian ChroniclesAbout Contrarian ChroniclesLearn the Contrarian Chronicles lingoSubscribe to Market Rap on Fleckenstein CapitalFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8'); 0Comments var initData = {"partnerId":"54bd59b2-6179-4753-ac3f-009a75d55388","jsUrl":null,"strings":{"lc_shw":"true","lc_dtf":"%M/dd/yyyy %h:mm tt","lc_dtf2":"ddd %h:mm tt","lc_gmt":"-5","lc_erg":"Comments are currently unavailable. Try again later.","lc_det":"Comments are unavailable on this page.","lc_pgf":"{0} of {1}","lc_1ach":"Comment","lc_ach":"Comments","lc_newm":"Newest","lc_oldm":"Oldest","lc_bestm":"Best","lc_worstm":"Worst","lc_mixedm":"Controversial","lc_prv":"Previous page","lc_nxt":"Next page","lc_pageNumTooltip":"Enter a page number, and then press the Enter key","lc_first":"First page","lc_last":"Last page","lc_rpl":"Reply","lc_rbs":"Report","lc_edt":"Edit","lc_del":"Delete","lc_pstthanks":"Thanks for posting to","lc_pstand":"{0} and {1}","lc_seemore":"See more . . . ","lc_seeless":"See less . . .","lc_rpttxt":"Thank you for reporting.","lc_msg2mod":"Send note to moderator . . .","lc_cc0":"Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates the","lc_cc1":"Code of Conduct","lc_cc2":"Please use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.","lc_cat":"Categories","lc_spa":"Spam","lc_che":"Child pornography or exploitation","lc_pro":"Profanity, vulgarity or obscenity","lc_cor":"Copyright infringement","lc_har":"Harassment or threat","lc_usrpic":"Inappropriate user picture","lc_oth":"Other","lc_abc":"Additional comments","lc_opt":"(optional)","lc_atl":"100 character limit","lc_rep":"Report","lc_1hourm":"1 hour ago","lc_1minm":"1 minute ago","lc_recomm":"You recommend this","lc_recomdontm":"You don\u0027t recommend this","lc_voted":"You have voted on this","lc_suicide":"Threats of suicide","lc_joi":"Be the first to comment","lc_shwm":"Show comments","lc_hidem":"Hide comments","lc_hourm":"{0} hours ago","lc_minm":"{0} minutes ago","lc_secm":"{0} seconds ago","lc_add":"Add a comment","lc_dmg":"Are you sure you want to delete this comment?","lc_dok":"Delete","lc_dca":"Cancel","lc_pna":"There\u0027s a problem creating posts right now. Please try again later.","lc_clt":"This discussion is closed. New comments cannot be posted.","lc_fta":"Be the first to comment","lc_fsg":"Be the first to add a comment. To add a comment, please","lc_sgn":"sign-in","lc_lnk":"Read comments","lc_spell_gen_err":"Could not check spelling. Please try again later.","lc_spell_no_mist":"No spelling errors found.","lc_spell_num_mist":"Spell check detected {0} mistake(s).","lc_spell_in_prog":"Spell check in progress...","lc_spell_check":"Check Spelling","lc_post_gen_err":"There's a problem creating posts right now. Please try again later.","lc_post_long":"Post cannot be longer than {0} characters.","lc_post_empty":"Your post cannot be empty.","lc_cmnt_day_max":"You already reached the daily limit for posts today. Please post again tomorrow.","lc_post_prog":"Post in progress...","lc_post":"Post","lc_save":"Save","lc_not_auth":"You are not signed in.","lc_no_suggest_paren":"(No suggestions)","lc_ignore_paren":"(Ignore)","lc_insrt_emot":"Insert Emoticon","lc_cancel":"Cancel","lc_ok":"OK","lc_fmt_quote":"Format as Quote","lc_incr_indnt":"Increase Indent","lc_decr_indnt":"Decrease Indent","lc_bullets":"Bullets","lc_numbering":"Numbering","lc_italic":"Italic (CTRL+I)","lc_bold":"Bold (CTRL+B)","lc_post_dirty":"Edits you have made to your post will be lost.","lc_rte":"Rich Text Editor","lc_ip_banned":"The computer or device you are using is temporarily banned from posting on this site. People or automated programs have recently used this computer or device to create unwanted posts. You may still browse the site and read other people's posts, but you can't create, edit, or delete posts.","lc_chk_msg_spell":"Check message for spelling errors (F7)","lc_post_msg":"Post this message (CTRL+ENTER)","lc_perm_ban":"This Windows Live ID was banned for violating the Code of Conduct. You may still read other people's posts, but you can't create, edit, or delete posts.","lc_temp_ban":"This Windows Live ID is banned from posting on this site until {0}. You may still read other people\u0027s posts, but you can\u0027t create, edit, or delete posts. ","lc_also_pst_fb":"Facebook","lc_also_pst_wl":"Windows Live","lc_also_post_to":"Also post to:","lc_idnt_settings_err":"Could not save your settings. Try again later.","lc_idnt_nick_prohibited":"The nickname you requested is not allowed. It may contain a reserved name or profanity. Please enter another nickname.","lc_idnt_nick_unavail":"The nickname you requested is not available. Please enter another nickname, or select one of these suggestions:","lc_idnt_nick_empty":"Nickname cannot be empty","lc_idnt_nick_max_len":"Nickname cannot be longer than {0} characters","lc_idnt_nick_allowed_chars_err":"You nickname may only contain letters, numbers, hyphens, underscores, and periods. Please enter another nickname.","lc_idnt_lnk_msn_wl":"Link your MSN posts to your profile on Windows Live","lc_idnt_posting_name":"Now when you post with your \u003cstrong\u003ename\u003c/strong\u003e, all of your past and future MSN posts link to your profile on \u003ca href=\"{0}\"\u003eWindows Live\u003c/a\u003e so your friends can read them.","lc_idnt_posting_nick":"If you keep posting with your \u003cstrong\u003enickname\u003c/strong\u003e, your posts aren't connected to your profile on Windows Live.","lc_idnt_name_nxt_psts":"The name you choose appears next to all of your past and future MSN posts.","lc_idnt_post_w_name":"Post with my name","lc_idnt_kp_post_w_nick":"Keep posting with my nickname","lc_idnt_chs_name":"Choose the name that appears next to your posts","lc_idnt_name_lnk_wl":"If you post using your name, your posts link to your profile on \u003ca href=\"{0}\"\u003eWindows Live\u003c/a\u003e so your friends can read them.","lc_idnt_nick_no_wl":"If you create a nickname, your posts are not publicly connected to your profile on Windows Live.","lc_idnt_post_w_nick":"Post with a nickname","lc_idnt_enter_nick":"Enter nickname","lc_idnt_post_w_yr_name":"Post with your name","lc_idnt_mst_use_name":"You must now use your name when you post here.","lc_idnt_note_post_w_name":"Note: When you post using your name, your posts link to your profile on \u003ca href=\"{0}\"\u003eWindows Live\u003c/a\u003e so your friends can read them.","lc_continue":"Continue","lc_idnt_create_nick":"Create a nickname","lc_idnt_nick_nxt_pst":"Your nickname appears next to your posts on MSN.","lc_idnt_nick_allowed_chars":"Nicknames may contain letters, numbers, hyphens, underscores, and periods.","lc_cmnt_unavail":"Commenting is currently not available. Try again later.","lc_loading":"Loading...","lc_signin":"Sign in","lc_signin_create":"Sign in with your Windows Live ID, or create a new one.","lc_spam_msg":"Your post was blocked because it appears similar to spam or automated messages. If this is not the case, revise your post and try again.","lc_wrt_cmnt":"Write a comment...","lc_avtr_pic":"User Picture","lc_edit_cmnt_err":"Could not load comment for editing. Try again later."},"isCommentShow":"true","_p":"","locale":"en-us","forumId":"00120065-0000-0000-0000-000000000000","forumTitle":"MSN Money","boardId":"00000065-02a6-0000-0000-000000000000","boardTitle":"ArticleComments","threadId":"b1711402-22b5-4082-b0ee-55a8aa207206","title":"Article Comment","userId":"b5e44170581cc833","contentId":"hw3eduyak2egnr9dhexm80pg6ru9wsjw","pageUrl":"http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/keep-an-eye-on-gold-bonds-in-2011.aspx","appUri":"http://social.msn.com/boards","cssBaseUrl":"http://blstc.msn.com/br/scp/css/15/","emoticonBaseUrl":"http://us.social.s-msn.com/s/","responseBridgeUrl":"http://articles.moneycentral.msn.com/scp.aspx","cmntSharingOn":true,"cmntSharingNetworks":[{"id":0,"locKey":"lc_fb","tooltipLocKey":"lc_also_pst_fb"},{"id":1,"locKey":"lc_wl","tooltipLocKey":"lc_also_pst_wl"}],"omniAccount":"MSNPORTALSCP","currentPage":1,"totalPages":0,"sortOrder":0,"isAuth":false,"signInUrl":"https://login.live.com/login.srf?wa=wsignin1.0&rpsnv=11&ct=1292680594&rver=5.5.4177.0&wp=LBI&wreply=http:%2F%2Farticles.moneycentral.msn.com%2FInvesting%2FContrarianChronicles%2Fkeep-an-eye-on-gold-bonds-in-2011.aspx&lc=1033&id=250710","genericAvatarUrl":"http://us.social.s-msn.com/s/images/bluemann.png","settingsCookieDomain":"msn.com"}; scpjs.Comments.init(initData , false, true); /*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*

What is really remarkable is that with investment demand at 40% of gold production, the number of gold bulls with any substantial allocation is still minute. . . . to bubbles? Perhaps by the time this bull market has run its course, investment demand will approach 100% of annual gold production, though we can never forget that nearly all the gold that has ever been produced (enough to fill just two Olympic-size swimming pools) is still in existence. So it's not just the gold that gets dug out of the ground each year that is available for sale, but potentially almost all the gold in the world.

Of course, someone who has bought gold would need a reason to sell it, with some sort of financial prudence on the part of governments and central banks being the most likely catalyst. But as readers of my column (at least) should know, we are still millions of miles away from that. It can't be bad news, so it must be good As a lead-in to my second point, I wanted to comment a bit on Best Buy (BBY, news, msgs), which announced its results Dec. 14. Not only did the electronics retailer miss estimates, but it was also forced to lower guidance prospectively, as demand has not materialized the way the company had hoped.

As a consequence, its stock price was smacked for 15%, although the market itself impressively fought off more rising bond interest rates to close about even (the Dow Jones Industrial Average ($INDU) closed with a 0.4% gain).

Normally, I would have expected the major indexes to take a bit of a licking on that news, as Best Buy has always been deemed to be a well-run retailer and a good barometer of business (especially at this time of year).

However, the denial currently runs so deep regarding what is next for the economy and the stock market that, apparently, the bulls were able to convince themselves that somehow Best Buy's results were company-specific. Thus, businesses associated with Best Buy, which in the past would also have been sold in sympathy, were given a pass. It is quite similar to the treatment we saw when Cisco Systems (CSCO, news, msgs) reported its results Nov. 10.

I mention those two companies because they, as well as others, illustrate a consequence of government money-printing. The additional liquidity goes where it goes (usually into stocks, since the Fed's low-interest-rate policies make more conservative alternatives less attractive), psychology gets deranged and nonsense passes for knowledge.

The net effect is to increase the riskiness of stocks generically, as "normal" market reactions become suppressed, creating an unhealthy environment. Treasury misery loves company A variation of that same theme seems to be what has stopped the bond-market rout from being regarded as bad news.

Apparently, a school of thought has "evolved" that the decline in the bond market is not about the Fed losing control of the printing press, as I have maintained, but about economic activity surging. Thus, the weakness in bonds is (supposedly) good news.

So if you really think that bond weakness is linked to the economy catching fire, and you extend that argument out, then you should be expecting even higher rates and more inflation, though the latter is certainly not on the radar of any such Pollyannas. Bond market bravery: 'It's only a flesh wound!' Recently, I headlined a column at FleckensteinCapital.com (subscription required), "Party Like It's 1999, Part III," and that is how the equity market landscape looks to me.

After living through the stock and real estate bubbles, you'd think it would be impossible to be surprised by how foolishly people can act. But with the amount of machismo, bravado and downright cluelessness that I see on display, I must admit I am dumbfonded.

Sadly, it seems that the vast majority of Wall Street types have learned almost nothing from the near-death experience they had only two years ago. My guess, though, is that 2011 will reacquaint them (again) with the fact that financial assets can cost you a lot of money.

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.More from MSN Money

Read Full Article »