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Tuesday, August 9, 2011

8/9/2011 - Is Gold at a Top? Shoeshine Boy Indicator Says Not Yet

By James Kostohryz Aug 09, 2011 11:10 am

Shoeshine boys giving stock market advice has become a Wall Street metaphor for prototypical behavior at the top of financial markets bubbles. But this indicator has not yet been triggered.

The story of how Joe Kennedy avoided ruin in the 1929 stock market crash is a Wall Street legend. While getting his shoes shined, Kennedy’s shoeshine boy started giving him advice on what stocks to buy. At that very moment Kennedy claims he had an epiphany, realizing that it must be time to sell. After tipping the bootblack, Kennedy reportedly hurried away and sold all of his stock holdings just in time to avoid the carnage of the 1929 stock market crash.

Similarly, Bernard Baruch, the legendary Wall Street trader, famously wrote of the zeitgeist as it manifested in the common man at the height of the 1929 bubble:

“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.” 

Shoeshine boys (taxi drivers, waiters, etc.) giving stock market advice has become a Wall Street metaphor for prototypical behavior at the top of financial markets bubbles.

What Are the Shoeshine Boys Saying About Gold These Days?

Just in the past week, several friends have forwarded the following anecdotal reports to me.

1. A plumber working under a sink asked whether he should put all his retirement money in gold.

2. A taxi driver, making the rounds, asked his passenger how he could invest in gold.

3. An auto mechanic asked a friend what he thought about gold while he was working under the hood.

The people that reported these incidents to me are all investment advisors. Their take on these incidents was that these were potential signals of a top in gold. The indecisive action in gold last week in the midst of panic seemed to reinforce this hypothesis in their minds.

However, I think it would be premature to say that these incidents qualify as sell signals as I interpret the “shoeshine boy indicator.”

A Specification of the Shoeshine Boy Indicator 
Below is my interpretation of how to specify the famous “shoeshine boy indicator.” The requirements of this indicator are met when the following two conditions are in place:

1. The “shoeshine” boy is not merely asking questions about speculating in a given asset or even just reporting about having made an investment in such an asset. This indicator is triggered when the “shoeshine boy” states that he has been investing in this asset class for some time and enthusiastically brags that he has made LOTS of money doing so.

2. The “shoeshine” boy is not merely asking questions about or reporting having made investments in a particular asset class. He is actively and enthusiastically recommending and promoting investments in said asset class, saying things such as “you are a fool if you do not do it.”

In sum, the shoeshine boy indicator flashes a “sell” when the protagonist both indicates that he is an experienced investor that has made money for quite a while in the given asset class and simultaneously proselytizes about the virtues of investing that asset class as a “sure thing.”

My read is that the “shoeshine boy indicator” has not been triggered yet with respect to gold. The ”shoeshine boys” in the recent examples given are still just asking questions and/or barely getting their feet wet in the world of gold speculation.

And by the way, “shoeshine boys” are not just blue-collar folks. Indeed, I think that one of the most definitive trigger events will be when university professors -- a class of individuals that previously would have be ashamed to even talk about gold in decent company -- start singing the praises of gold. Again, we are not there yet. Today, gold pundits are still considered a disreputable bunch within academic circles.


So, am I advising people to purchase gold? No. At this point, gold is very overvalued on virtually any fundamental measure. Whether you measure the value of gold relative to real estate, stocks, a basket of consumer goods and services or marginal production costs, the yellow metal is registering overvaluation of historic proportions. As a consequence, gold investing at these prices can only be premised on the greater fool theory.

Thus, when I say that the “shoeshine boy indicator” has not yet been triggered, I am not recommending speculation in (GLD), (GDX) or anything else related to gold. I am merely saying that a few more people will need to be sucked into gold investing before the terminal stage of a full-blown gold bubble plays itself out.

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