This has been one of the most volatile weeks yet for markets, and there’s no sign of the upheaval stopping. Just how fragile confidence is at the moment was brought home to me sharply when we had our regular Roundtable meeting this week. You can read the whole thing in the magazine next week, but it’s safe to say that everyone there was unapologetically gloomy.
In the wake of the Bear Stearns bail-out, it may not be so surprising that investment experts feel downbeat. But the extent of the pessimism impressed even me. For one thing, everyone around the table agreed on one point. By the time the credit crisis has finally worked its way through the system, current shareholders in most UK banks will be lucky to be left with anything of value. Banks won’t necessarily go bust as such. But after the rounds of fund-raisings and Government intervention that will eventually be necessary completely to repair their balance sheets, the shareholders’ equity will be diluted to next to nothing.
It’s a very sobering view. It certainly shows up the various press articles describing banking shares as ‘contrarian’ buying opportunities for the nonsense they are. Being a contrarian means buying the things that everyone else genuinely hates, and seeing an upside where no one else thinks there is one.
Buying banking stocks just now is not being contrarian. It’s more like buying a tech stock after the dotcom bubble burst in 2000. It’s a simple refusal to accept the bull market is over. Such investors are simply buying on what they think are the dips, only to find that they’ve actually tried to catch a falling knife and seriously damaged their wealth in the process (see: How safe are British banks?).
A true contrarian move, on the other hand, was buying gold in 2000 when everyone else was selling it and wondering what they’d ever seen in the pointless, barbarous relic. In fact, a few days ago I was flicking through an old issue of MoneyWeek from 2001, when I came across a quote from the FT declaring that gold’s recent ‘surge’ to a whole $290 an ounce was down to technical factors, rather than anything more fundamental. “There is still no reason to buy gold, and every reason to sell.”
Seven years later and gold has managed to push through the $1,000 an ounce mark, and a feature on ‘how to buy gold’ even made the BBC television news the other day. In that light, you can’t argue that buying gold is still a contrarian play. But is it time to sell yet? We don’t think so – there may well be a short-term pullback after the recent strong run, but the parlous state of the US economy, not to mention the global banking sector, suggests that gold’s bull run may have some way to go. I’d suggest you pop some in your Isa, if you haven’t already.