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A Contrarian’s Guide to Buying Gold – for Maximum Short-Term and Long-Term Gains
Gold Trading Forecasts & Alerts
The best strategy for accumulating a meaningful position in gold is to invest at regular intervals – such as once per quarter – in a dollar-cost averaged basis, thereby insuring that you buy more gold when the price is low and less when it’s higher. If you choose to time your entry points, however, there are two winning strategies for market timing. Both are based on the contrarian theory of buying when sentiment is dismal.
Strategy #1: Short-term Timing – Buy After Sharp, Sudden Dips
Whenever a positive economic statistic comes out – such as the July jobs report, released last Friday, August 5 – gold tends to collapse in price fairly sharply. In this case, gold fell from $1360 to $1347 in a matter of minutes and then down to $1335 by day’s end. The misguided theory behind these trades is that a positive economic statistic gives the Federal Reserve a reasonable excuse to raise rates at their next meeting. Higher interest income presumably are bad for gold. (History doesn’t bear out that correlation, but traders presume that the masses don’t know that fact, so they choose to sell before others can sell.)
The fact of the matter is that the fed funds futures market – which puts real money on the line betting on what the Fed Funds rate will be at the end of each year – is betting that there will be NO key interest rate increases in 2016 and maybe one rate increase (at most) before the end of 2017. This means that interest rates will remain ultra-low in the U.S. for at least another year, while interest rates in Japan and most of Europe are below zero. Last week, the Bank of England reduced rates from 0.50% to 0.25%, the lowest rate ever offered in the 322-year history of the Bank of England, whose current Governor, Mark Carney, hinted that there could be another rate cut to zero by year’s end. (He ruled out negative rates…for now.)
In a world economy saturated with threats of deflation, near-zero interest rates should continue for years. Governments must love this new idea – which cuts the cost of financing their national debt to near zero.
This strategy works both ways. Gold soared on the last trading day of July when the second quarter GDP figures came in well below expectations. Economists surveyed by The Wall Street Journal expected to see 2.6% GDP growth last quarter, but the actual number came in at just 1.2%. In quick response, gold gained $20 – rising from $1334 to $1355. The theory, once again, is that a low GDP number would virtually guarantee that there would be no Federal Reserve interest rate increase in late September.
This knee-jerk reaction also tends to occur after negative jobs reports. In May and June, the jobs report was depressing and gold soared. When the April jobs data was released at 8:30 am on the first Friday in May, gold shot up $15, from $1278 at 8:29 to $1293 as of 8:31. The next month, on Friday, June 3, the jobs report for May also came in below estimates, so gold shot up $30 within 15 minutes of the release.
That’s generally not a good time to buy gold. Wait for the inevitable correction before buying more gold.
In summary, a short-term timing strategy is to avoid buying gold when it shoots up after a widely-watched economic statistic shows a weaker-than-anticipated number (like low GDP growth or low job growth). Instead, buy gold after it sinks following a positive report. In time, all these reports tend to offset each other, but we can take advantage of short-sighted traders to buy gold after a sharp correction.
Strategy #2: Long-term Timing – Buy When Wall Street Hates Gold
In hindsight, the best time to buy gold was last December 17, the day after the Federal Reserve raised rates for the first (and perhaps only) time in nearly a decade. Gold touched a five-year low price of $1049 that day. At the time, the Fed indicated they would raise rates four times throughout 2016. So far, they have not raised rates at all this year and are unlikely to raise rates any time soon. Since traders uniformly believed the Fed’s promise of four rate increases, they thought that gold would soon fall below $1000.
Here’s the proof. At the beginning of each year, the London Bullion Market Association (LBMA), the group that sets the famous twice-daily London gold price “fix,” polls dozens of leading investment analysts – most of whom specialize in the metals markets – to make a guess about the high, low and average prices for gold, silver and platinum over the next calendar year. Most of these forecasts were made in late December, after gold reached its nadir and most analysts expected more rate increases.
As this chart shows, these analysts predicted an average $1091 gold in the first half and $1103 average by year’s end. Most predicted gold would fall below $1,000 sometime during 2016. The winner of the 2015 price competition (Bernard Dahdah of the French investment bank Natixis) predicted an average price of $970 and a low of $900. Only one of the 31 analysts thought would top $1350 at any point during 2016, but gold crossed $1200 for good on February 11 and gold has traded above $1300 every day since June 24, the day after Brexit. Every correction has been followed by more buying – especially by Wall Street!
You would think that more than one of 31 analysts would predict an average price above $1200 or a peak price over $1400, but there seemed to be a “race to the bottom” among these analysts last December. The sad truth is that most analysts predict a continuation of existent trends, since the trend in place usually stays in place – until it doesn’t. It takes courage to carve out a minority position, that the trend is about to end, but if analysts took the combined forces of more demand, due to negative interest rates, combined with less supply, due to so many gold mines closing due to five years of low prices, they would see that high prices would not represent such a risky contrarian prediction. Careers could be built on such bravery.
Throughout 2016, many of these analysts – and many of the major investment banks on Wall Street – have changed their tune, climbing on the gold bandwagon after missing the first $200 or so in gains. In the last week, we’ve seen two famous “Bond Kings” (Bill Gross and Jeffrey Gundlach) recommend gold as a better investment than either stocks or bonds. When Bond Kings tout gold, it’s a brave new world!
In the first seven months of 2016, inflows to gold-backed exchange-traded products (ETPs) have already broken any previous year’s full 12-month record inflows. Barclays reported that “precious metals, and gold in particular, have been the most favored commodity sector, attracting heavy inflows via ETPs. So far 2016 is shaping up to be the best year ever for inflows to this type of product.” Looking at the three most recent months in particular, Barclays reported, “Precious metals were still the driving force behind ETPs inflows, bringing in $4 billion, $5.5 billion and $1.6 billion for May, June and July, respectively.” If no new events trigger sudden outflows from gold ETPs, 2016 should be a new record year for gold ETPs.
We have the faint suspicion that if gold goes down $100 in a month or two, much of this support will quickly erode, but that kind of a correction would represent another great buying opportunity, in our view. The best buying point of all, however, is in times like 2000, 2008 or 2015, when “nobody” liked gold.
In summary, it’s best to buy gold at regular intervals and then store it and “never” sell it. But if you want to make a large single purchase, the best time is when Wall Street hates the metal. Once gold is rising again, the best time to add to your position is after short-term traders pull the trigger on gold prematurely.
Wall Street likes to act first and think later. We prefer planning ahead to buy more gold at such moments.