December 3, 2022

Gold Featured on Magazine Cover- Should We Be Worried?

There is a body of empirical evidence suggesting that once a particular investment category is featured on the cover of a popular magazine, a major trend change is imminent.

This theory, know as the “Magazine Cover Indicator” was first documented by Paul McRae Montgomery, a strategist at Legg Mason.  According to Mr. Montgomery, “The great value of popular magazine covers is they indicate the extent to which awareness of fundamental factors is widely shared, and therefore are unable to move prices significantly further”.

The Magazine Cover Indicator has been dismissed for being overly simplistic.  Nonetheless, Mr. Montgomery’s research shows that after a financial trend is featured on the cover of a widely distributed magazine, there is a high likelihood of a major trend reversal.  The focus of Mr. Montgomery’s research was Time Magazine cover stories going back to 1914.  When  a specific financial investment was the cover feature, within a year and up to 80% of the time, the trend featured on Time’s cover had reversed and sometimes in a dramatic fashion.

One of the all time great clarion calls for investors was the now infamous BusinessWeek cover story headlined “The Death of Equities” in August, 1979, just prior to the greatest bull market for stocks in history.  According to Montgomery, the indicator has resulted in profits for him and his clients, stating that “It has worked surprisingly well, but people don’t take it seriously.  I actually move money based on it, but I don’t think many other people do”.

Given the research cited above, should we be worried about this week’s magazine cover story by SmartMoney entitled “The Power of Gold”?

Despite the apparently bullish title, after reading “The Power of Gold”, one gets the distinct impression that the article is bearish on the yellow metal.  Investors are portrayed as beset by doubts about owning gold and worried that they will be regarded as “crackpots” if they disclose their predilection for gold ownership.  If the article had been rampantly bullish, it would have quoted gold investors bragging about their investment acumen and predicting further huge price gains.  A bullish article would have also featured photos of small time “joe six pack investors” lined up outside of bullion dealers, desperately clutching handfuls of dollars to convert into gold.  We are not even close to classic signs of a top in the gold market.

SmartMoney notes that “people are buying gold in record amounts, but in many cases they don’t really feel good about it…Others fear that they’ll be targets for robberies or scams, or be branded as crackpots by their friends and neighbors”.  Although SmartMoney mentions the huge growth of the SPDR Gold Shares Trust (GLD), ownership of gold by Americans is still small, representing only one-eighth of all bullion and coins in the world.

SmartMoney also plays down any further upside movement in gold stating that “Of course, a further price surge isn’t inevitable or even, in the eyes of some professional investors, probable.”

The “Magazine Cover Indicator” in this case represents a solid buy signal for gold based on SmartMoney’s bearish article.

Whether one believes in the “power of magazine covers” or not, the fundamental reason for owning gold remains intact – preserving the purchasing power of accumulated wealth.  The value of paper dollars is under ferocious assault by both the government and a financial system that must inflate to survive.

The only government response to the debt crisis has been to add more debt.  The Government budget proposal for fiscal 2012 has the United States borrowing almost half of the entire amount to be spent next year.  The proposed budget requires deficit financing by the United States of an unimaginable $1.65 trillion, or 44% of proposed spending of $3.73 trillion.  Even more disconcerting, a large proportion of the deficit will be funded by the Federal Reserve creating dollars via “quantitative easing”.

Governmental, private and corporate indebtedness has reached levels that make repayment mathematically impossible.  Deflation and debt collapse is not an option being entertained by the government nor is it an option that most Americans would select over inflation.   The nation needs inflation to prevent a level of defaults that would make the Great Depression look like a minor recession.  When this dark reality becomes obvious, gold will have no upside limit.