Not too long ago I posted an article that discussed the merits of acquiring gold when it had just reached the $540 per ounce area. In it, I pointed out that one might save $10 or $20 dollars if they waited for gold to drop back to a lower level but I also pointed out the risk of being left at the station only to see that the gold train had pulled away...without them.
Perhaps you spoke with your broker about gold. Well, this was most likely one of the guys who was touting the NASDAQ in 2000. I suspect they're not going to recommend gold simply because they stand nothing to gain. They're job is to sell paper...stocks. That's how they make commissions and their living. No, one has to stop listening to the siren songs of the last decade and look around a see what is going on and make their decisions accordingly.
Today, the price of gold has closed at $492 per ounce. Wow, was my statement really bad? Was your broker right after all? Well not really. The number one rule of investing is to not miss a bull market. The only way one can do that is to establish a position and be in...through the short-term highs and lows. Since the price of things fluctuates going up and down, the prudent individual invests over time using a mechanism known as dollar cost averaging. This means they make their acquisitions over time which smoothes out the variations. If I purchased an ounce of gold at $540 and a month later the price is at $460 and I purchase another ounce, my average cost is $500. Similarly, if after I purchased my first ounce, at some time in the future gold is at $620 and I purchase another ounce, my average cost is $580.
The take away message is that there is only one point to remember: in a bull market, (in 2000 gold was at $250 per ounce) the important thing is to establish one's position. The good news is that one doesn't have to plunge into the market hoping, against the odds, that they have gotten in at the bottom. They can implement a disciplined, orderly, regularly scheduled program of acquisition knowing that the ups and downs are smoothed out as they do so. It's next to impossible to buy on the exact low and the risk of trying to do it is that you may find yourself out of the market looking at higher cost to get in.
The price of gold is rising in what is called a channel. The channel can be illustrated by drawing two parallel lines on a graph of the price of gold over years. The lower line traces the lows of the price and the upper line traces the highs. They tend to illustrate the overbought and oversold state of a given item. Given that in 2000, gold was at $250 per ounce, the channel illustrates a bull market is in play. Also, given our governments proclivity to print money, it's no wonder. Last month, gold broke out of that channel to the upside and may be in the process of establishing a new channel at a higher angle of ascent, or it may return to the boundaries of the original channel. It doesn't really matter as ultimately, the trend appears to be up.
So, from a technical analysis perspective, given our channel work, the price of gold could possibly go to the lower line of the channel, approximately $460 - $480 (depending on the time frame) and if that level holds, the price should continue up again to the upper channel line of approximately $520-$540. On the other hand, if the price of gold fails to meaningfully penetrate the upper line of the channel ($480 - $490) a new channel could be established meaning that the rise of gold would be more vertical.
Got that? If not, feel free to drop us a line on the Feedback page and I would be happy to provide more explanation.
Through the last five years of the '90s, the slogan in the stock market was "buy the dips". Sure, it was a bull market and people became conditioned to buy any dips almost guaranteeing a profit. That behavior also ensured the bull market...until 2000 when the bull market was perceived to be a bubble and finally burst. Unfortunately, as the markets continued to plummet, they "bought the dips" like conditioned white rats (see B.F. Skinner on behavioral modification, reinforcement history and classical conditioning) during the corrections higher only to find the trend ultimately going lower. Since I believe the bull market in gold has 5 to 10 years to go, the "buy the dips" strategy makes sense once again but personally, I would only use it as a supplement to my basic strategy of dollar cost averaging mentioned above.
Lastly, gold is insurance against the loss of one's wealth through the erosion of inflation and a general disenchantment and distrust of fiat currencies around the globe. Since it appears that this erosion is going to continue for the foreseeable future, it explains why the trend in the price of gold is up and it matters little if one acquires gold at every periodic bottom. What matters is that they acquire gold.
