As Shakespeare could have said, to buy gold is the question and it is about time that the ‘to buy gold’ question was answered.
We are going to keep this simple as there are endless reasons for and against buying gold at this moment in time, most of which we have discussed in articles on this site. Right now we just want to highlight what we think are the most relevant and immediate pros and cons in the hope that we can shed some light on the ‘to buy gold ‘ question.
This Risk Aversion Scenario
In the wait and see camp, to buy gold is a no – no in the present circumstances and they are in a clear majority. Cash is king, while the dollar is looking good, at least in the (very) short term.
US government bonds are easily and quickly traded and despite the current exceptionally low yields not keeping pace with inflation, at least there is some return on money that would be earning nothing under the mattress or sitting in the bank.
This risk aversion scenario has, at its core, two interlocking factors in investors minds, uncertainty surrounding other asset classes, precious metals included, together with ready access to funds to take advantage of any investment opportunities that may arise if and when the worldwide, or home grown, political and economic situations become clearer.
This school of thought is not confined to any investing or speculative class. Fund managers of every hue thru to small retail investors and short term speculators are beset with the same uncertainty so it is entirely understandable that despite the ever strengthening of the fundamental reasons for protecting wealth by holding gold, to buy gold is not yet at the forefront of their financial planning. One strong piece of evidence to support this view is the major shift in the gold futures market where we have seen the ratio of forward contracts not so long ago heavily weighted toward purchase contracts fall as bearish positions have been prevailing.
Gold Kept From Falling Below Support at $1500
The opposing camp has so far gallantly managed to keep gold from falling below the support level of $1500 an oz. that has been in place since the metal hit $1900 an oz. in Sept 2011. For this camp ‘to buy gold – that is the question’ has a straight forward answer but quite probably the most difficult in all investing to get right.
That is whether we are seeing the bottom of the market or will it break thru that $1500 support. To date the obvious answer is that the core gold buyers have come in at that level. We have this week, and not by any means for the first time, seen how sensitive the gold market is to both economic data and to the utterances of Ben Bernanke and his ilk, however vague.
It is this volatility, inspired by the uncertainty of the consequences of the next piece of verbal double speak emanating from our leaders at the fed, or even from Euroland, or data that disappoints that we believe is holding back gold from its destiny. Sooner or later gold will not be denied.
The ever strengthening fundamental factors can only prevail as US uncertainty, Europe contagion and now China showing more and more evidence of a Japan like slow down encourages yet more currency printing leading to yet more devaluation of the dollar, yuan, yen, euro and pound in our pockets (or in the bank or under our mattresses!).
To buy gold – that is the question we believe is best answered by yes – but when? Just be careful not to miss the market when it does take off!