Newbie gold investors have lost some of their treasure, and maybe their gold fever.

After setting record highs day after day, gold suddenly did what it's known to do: It morphed from Midas into Scrooge, plunging $90 an ounce in less than two days.

By the end of Monday, gold had recovered some of those losses, but the price still is down more than $60 from its Thursday high of $1,226 an ounce.

And Dennis Gartman, a trader and publisher of the Gartman Letter investment newsletter, warned investors not to assume that their pain is over.

"Too many naive investors got involved in gold," he said. "They must be taken out and given a right good caning." That is, he imagines a British schoolmaster trying to smack some sense into rowdy schoolboys.

Professionals don't want to buy gold again until the masses run away in fear, Gartman said. "This will inflict pain on the people who came late to the market," during the last one to three months, he said.

Serious investors always worry when too many regular people start pouring money into a single investment without an inkling about what might drive the price up or down.

There's a saying in the investment business that when the taxi driver and the delivery person are talking about a "no-lose; gotta-have" investment, it's time to run for the exits. At that point of maximum adoration and comfort, the masses have gone wild. And that's often the warning that the smart money is on its way to the exits and the novices will be trampled in the exodus.

Think technology stock bubble in 2000, or house flipping three years ago.

Now, think gold. What's disturbing is that this frenzy seems to have had a special appeal for seniors. Richard "Mac" Hisey, president of AARP Financial Inc., said that seniors have been calling for help finding gold. One woman, who was worried about living on CD income, wanted to know if she should use her credit cards to stock up on gold.

She was warned not to do it. If she did use her cards, she now owes more than her gold is worth.

Many people have no idea what has been driving gold prices higher or what could stop it. They've simply heard that gold is safe and climbing fast. After all, how can you pass up the magic word "safe" and big profits on an investment?

Some analysts say there are economic conditions in place that will enable gold prices to climb again after this downturn.

Goldman Sachs Group's precious metals team recently said that if U.S. interest rates stay low, that will be conducive to gold prices climbing next year to perhaps $1,350 an ounce. But if the economy strengthens and the Federal Reserve raises rates, "gold prices will come under significant pressure."

Presumably, it was Friday's government report on improving employment conditions that led to that day's sharp sell-off in gold, with some traders speculating that the Fed might raise rates sooner than expected.

What concerns Jim Paulsen, chief investment strategist for Wells Capital Management, is that the frenzy has led to a lack of clarity about what's been driving gold prices.

"Gold has been the answer to inflation; gold has been the answer to disinflation; gold has been the answer to too much debt and to the China bubble," Paulsen said. "But I have never known an asset that was the answer to everything."

Paulsen said gold is clearly overpriced, and consequently vulnerable to fall. Between 1980 and the present, gold has been trading at 1 to 2.5 times the CRB Commodity Index, which tracks a broad range of commodities. Now, he said, it's 4 times.

That means: Buyer beware and watch out for believing gold is "safe."

In 1980, gold hit a peak price of about $850, and then fell and disappointed investors for almost three decades. By 1999, the price was less than $300 and many patient investors doubted that they'd ever see $850 again. It wasn't until a few months ago that $850 returned. Now, the price is more than $1,100, but there's no guarantee that it will keep climbing.

If you had invested in gold in 1980, Ibbotson Associates said, you would have earned an average annual return of 2.6 percent a year - making CDs look better than you might think.

Gold also was more volatile than stocks. Yet they averaged an 11.2 percent-a-year return, despite last year's shock.

(c) 2009, Chicago Tribune.

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