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Gold: You are the biggest loser

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The gold bubble has finally burst — with worse to potentially come, writes Bruce Jackson of The Motley Fool.

In investing, as in life, you learn the most from your mistakes.

I’ve made my share of howlers, including rare earths minerals producer Lynas Corp (ASX: LYC), down 16% in the last month, now trading at around 50 cents.

It could have been worse…much worse. The stock is down 80% from its 2011 peak. I missed the peak, by a long distance, but the 50% loss I’m sitting on is a 50% loss, make no bones about it.

The last time I wrote about Lynas, a once-hot stock amongst private investors and day traders alike, I received a piece of feedback which went along the lines of…

“If that’s an example of your stock picking ability, how do you expect me to follow your stock tips?”

It’s a fair call.

Just to avoid any confusion, Lynas is in my personal portfolio, and not a stock we’ve ever recommended it in any Motley Fool publication. I’m suffering alone, amongst Fools anyway.

And so I should. I mean to say, what was I doing buying shares in a company operating under a legal cloud in Malaysia, and in the notoriously cyclical rare earths sector, a sector where producers have no pricing power?

This is why I’m not a billionaire

The whole experience reminds me of yet another classic Warren Buffett quote.

At the 1999 Berkshire Hathaway Annual Meeting, Buffett, during the rising crescendo of the tech bubble stated:

“We’re more comfortable in that kind of (traditional) business. It means we miss a lot of very big winners. But we wouldn’t know how to pick them out anyway. It also means we have very few big losers – and that’s quite helpful over time. We’re perfectly willing to trade away a big payoff for a certain payoff.”

Is that a clue as to why Buffett is a billionaire, and I’m not?

It’s another lesson learnt for myself, as I lick my wounds from my 50% loss on Lynas, and contemplate my next move, very mindful of not throwing good money after bad, but also willing to take advantage of irrational selling.

Mistakes…I’ve made a few.

But here’s one mistake I’ve NOT made…investing in gold, and gold stocks.

Gold: You are the biggest loser

Today’s big loser is gold. Just when you thought things couldn’t get any worse for the precious metal…along comes some investment bank boldly declaring

“The gold price is, in our view, in bubble territory.”

Welcome to the game, Societe Generale.

It was only a few short weeks ago when we reminded Take Stock readers of Foolish colleague Morgan Housel’s call of September 6th 2011 when he said “Dump your gold in favour of stocks“.

The message doesn’t get much clearer than that, and since then, it has been a one-horse race…

Gold DOWN 18%

Stocks UP 18%

The symmetry is beautiful.

The result for gold bugs has been devastating.

If they were feeling pessimistic in September 2011 — because let’s face facts, there were plenty of pessimists lining up to declare the end of fiat money, the advent of rampant inflation, and a return to the gold standard — they must be feeling positively suicidal by now.

Not making their mood any better is the hammering gold stocks have taken over the same period.

The big daddy of ASX gold stocks, Newcrest Mining (ASX: NCM) is down a whopping 50%.

Whatever the gold price, the cost of production for gold producers has been rising and rising and rising. The end result is just plain ugly.

Of course, from here forward, it’s the future that matters, not the past. When there’s blood in the streets, as there is with gold stocks at the moment, it’s often a good time to buy. Except that is, if the gold price keeps falling.

Gold: A vicious downward spiral

Soc Gen predicts the gold price will slide to US$1375 by December.

Worse, it says…

“A downward price spiral could see gold locked into a vicious downward cycle as increased producer hedging prompts ever lower gold prices and, in turn, more producer hedging.”

Tempting as it is, you won’t find me stepping in front of this oncoming train wreck…just yet anyway.

If gold’s not for you, The Motley Fool’s brand-new FREE research report, “3 Oil Stocks to Send Your Portfolio Gushing Higher” just might do it for you. Click here now to access the free report.

As ever, I wish you happy, profitable and Foolish investing.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool General Manager Bruce Jackson owns shares in Lynas.

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