December 16, 2011
BY: Robert Hallberg, Topics: Gold
Gold has been in a decade long up trending bull market and there are some interesting facts about gold investors should be aware of to avoid being shaken out of the bull market on a down day. Understanding the goldâs fundament strengths will give you the conviction of knowing when to buy and when to sell.
Gold has unique characteristics that make it suitable for money, and for the last 5,000 years it has been used for exactly that purpose. It is seen as a safe haven throughout the world, with the exception for a few Keynesian economists, and during times of distress, whether its inflation, deep deflation, war, or economic uncertainty people have always preferred gold.
As with any other asset, gold is cyclical in nature. This is perhaps the most important thing for investors to understand. Gold fluctuates in 15 â 20 year long cycles. By studying and understanding these cycles you will be able to buy it cheap, when no one wants it, and sell it at overvalued prices at the peak when it is in high demand.
First, letâs take a look at gold demand. There is a notable increase in investment demand for gold over the last couple of years. And even though demand for gold in jewelry is down the overall trend is up.
On the next chart you can see the steady increase in investment demand for gold. As of lately, investors have started to favor physical gold over ETFâs and other derivatives.
Another favorable trend for gold is that central banks have become net buyers of gold. This is breaking a two decade long trend where central banks had previously been net sellers. Since Bretton Woods in 1944, central banks throughout the world had been keeping US dollars in reserves as a means to settle international trades. But as the dollar has been depreciating in value so has its status as a reserve currency and many countries are favoring gold as a more stable store of value. This is a very powerful shift and it will drive the price much higher over the next couple of years.
As the price of gold has up in price year after year for over a decade there has been widespread talk about gold being in a bubble, especially among the mainstream media. However, looking at the chart you can see that gold is an under-owned asset and most investors have no exposure whatsoever. This is especially true among institutional investors such as, pension funds, endowments, and mutual funds. The chart below shows gold as a percentage of all other global assets.
As an investor, some important questions to ask are; how far will gold go and when will gold reach its peak. Rather than to put a dollar figure on the top in may help to look at previous cycles of bottoms and tops. A popular tool for measuring goldâs purchasing power is to compare it to the stock market or other assets. The chart shows the Dow Jones Industrial average in ounces of gold.
The chart clearly indentifies the cycles; each time gold reaches a high it corrects and bottoms out around 1:1 or 1:2 against the Dow Jones. The market actually works like an oscillator and the higher the top is the lower the bottom. Gold previously bottomed out at 2:1 and 1:1 against gold during the last two bull markets. The Dow Jones made an all time high of 1:44 against the Gold in year 2000, and it is possible that we will see a lower bottom this time. Perhaps half an ounce of gold will buy the Dow Jones Index at the peak.
Investment recommendations: Keep accumulating physical gold, and to a lesser degree gold stocks, until the Dow Jones reaches a ratio of around 1:1 against gold. Find a repeatable dealer that charges a reasonable markup and only buy gold bullion bars and bullion coins.
To learn about trends and spot the next investment opportunity read the Casey Report from Casey Research. It's a monthly investment news letter that breakdown economic trends in a way that is easy to understand. They make recommendations based on economic reality and their track record is several times better than the market or any mutual fund for that matter.
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