Question 7: When not to buy gold?
Answer 7: In a way, this question is more important than ‘when to buy gold?’ It is helpful to avoid making investment mistakes. There are times when gold is not a good buy. They include:
In a Stock Cycle –
There are two investment cycles, commodity cycle and stock cycle. Each cycle has an average timeframe of 18 years per cycle. Stocks do well in the stock cycle. Gold and silver don’t. The previous stock cycle had started in 1981 and ended in 2000. During this period, gold prices were depressed, gradually dropping from US$ 850 per ounce to as low as US$ 280 per ounce.
Weak Fundamentals –
Fundamentals refer to the study of supply and demand. In general, fundamentals resemble investment cycles. For instance, from 1981 – 2000, the fundamentals for gold were poor. Central banks were dumping gold in massive quantities. Mine productions were increasing in Australia, Canada and the United States with new mine discoveries, development and expansion. High supply and low demand are the recipes for depressing gold prices during the period.
Record Highs –
Today, we are in the commodity cycle. It is ideal to buy gold as the fundamentals are solid. Demand had been increasing while supply struggles to keep up with consumption. However, to maximize returns, it is best not to buy when gold prices are trading at its highest. Looking at gold price chart, the ideal time to buy is when gold price starts to trend upwards and before it reaches US$ 1,900 per ounce. Once prices go above US$ 1,900, it is best to hold and sell them when prices reach its new high.
In a commodity cycle, gold may move on a downtrend in the midst of a long-term bull market. When prices are falling, we do not know the magnitude of the fall. Hence, it is not a good time to buy. However, this is exciting times for savvy investors as falling prices are great times to buy solid assets at bargain prices. Savvy investors would wait for prices to switch from a downtrend to an uptrend first before buying. While there are many methods to confirm the switch in price trends, I personally use the SMA 50 – 150 crossover method to do so.
When Your Friends Buy –
This is just based on gut feelings. When everyone is recommend each other to buy gold without emphasizing on education & research but solely based on rapid and continuous hike in prices, then, there is a mania on gold. This is similar to the stock market in the late 1990s when many buy shares without considering its fundamental strength. I believe it is the worst time to buy gold but it is probably a fantastic time to think of selling gold and cash in.
This article is contributed by bestselling book author, Ian Tai. Want to learn more about gold and silver investment? Get Ian’s free training at Gold Silver Method.