All eyes are on gold, as the yellow metal has just dipped below the psychologically important $1,500 level. Major high-profile speculators — including George Soros — now appear to be taking some of their bets off the table. (See “Soros Selling Gold“)

Investors now have a choice: Should they use the recent weakness as an opportunity to buy more gold or, like Soros, should they take their profits and move on to greener pastures?

Long-time readers know that I’ve been bearish on gold for the past year (see prior gold posts).  I held firm that the bull market in gold was supported by increasingly flimsy arguments about inflation (which has yet to surface outside of volatile food and fuel prices) and that gold’s primary traditional use–as jewelry–appeared to be in terminal decline.  Even in India, the biggest consumer of gold since time immemorial, gold use for jewelry has been in decline since 2005.  Rising prices in the face of faltering real-world use gave the look of an investment whose fundamentals were rotting from within.

Anecdotal evidence, such as gold-dispensing ATM machines and the prevalence of “We Buy Gold” billboards across the country, only strengthened my view that gold was in a bona fide bubble or, at a minimum, it had simply become too popular to offer decent long-term returns.

The one gaping hole in my argument was that some very smart money disagreed with me.  In taking a bearish view on gold, I was effectively betting against George Soros, David Einhorn, and some other very talented hedge fund managers.  As a general rule, it doesn’t pay to bet againt the smart money, and this time was no different.  I was early in turning bearish on gold, and I should have been more patient.

The question, of course, is what now?  None of my arguments have changed.  Gold is not an investment.  It’s a speculation (see post).  The bullish arguments for gold are based more on political ideology and cynicism towards the government than on sound fundamentals.  It’s real-world consumption as jewelry has been replaced by bullion for “investment.”  And now, we see the smart money starting to lose interest.

Gold might continue to fall, or this could simply be a bump in the road on the way to new highs. Only time will tell. But without a crystal ball, we investors have to make decisions based on the information we have. And right now, gold looks like a bad bet.

Investors might want to follow George Soros’s lead and get out while the getting is good.  I might suggest they follow Warren Buffett’s advice and move their attention to attractively priced stocks paying reliable dividends.

Charles Lewis Sizemore, CFA

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