Get Ready for Another Gold Buying Opportunity

Thu, Dec 1, 2011 - 4:16am

In light of this insane market volatility, I wanted to briefly re-examine the case for gold in today’s Money Morning.

My current one-year view on gold – the metal that is, not the miners – is unchanged. When gold went to $1,920 an ounce it had moved too far, too quickly and got ahead of itself. It needed to correct and now it needs to consolidate for several months more at these higher levels before launching on the next leg up.

The same thing happened in May 2006 and February 2008. On both occasions it was a good year and a half before we saw new highs. I wouldn’t be surprised to see something similar happen now. In other words we may not see new highs until next autumn at the earliest.

But am I selling any of my gold? No. I could very easily be wrong with my new high theory. In fact, I hope I am.

As newsletter writer Dr Marc Faber says, the risk in this market isn’t in owning gold. It’s in not owning gold.

Hang on to Your Gold

Last Monday gold fell $50. Days like that may not make sense – surely you would buy gold in a panic? – but there’s a big difference between what goes on at the speculative, paper end of things and in the physical markets.

During these panics, people will sell anything – either they’re forced to because of margin calls, or they’re simply losing their heads – and out of the window goes their easy-to-dump paper gold.

The physical, however, stays buried. So despite the bumpy ride, you shouldn’t be tempted to sell your core gold holding. In fact, you should add to it.

Even if we get another 2008-style crash – and the stage is well and truly set for it, if not something worse – and gold sells off just as it did then, don’t be shaken out. I still comfortably believe that gold will be a good 15-20% higher in a year’s time than it is now.

By the close last Monday, gold was at $1,670. Gold investors felt battered. But as I write this a week later, gold is trading at $1,714, $44 higher. Or to take a slightly longer-term example, gold has sold off several times since the Greek crisis hit its first peak in April / May 2010. But back then it was $1,150 – now it’s over $1,700.

And below is a five-year chart. It can be a rocky ride – occasionally gold gets ahead of itself and pulls back - but the trend is not hard to spot.

Buy More Gold if it Falls Below ,680

It’s still not quite clear to me how this crisis will resolve itself. We might see the mother of all bank runs, or the mother of all print runs, or both. But in either scenario, you want gold, the money of last resort.

Gold is nobody else’s liability. It sits outside the financial system, which, given the threat of contagion across our inter-linked financial system, is exactly where you want to be. Nothing is safe during a global rout, but gold is surely the most desirable form of cash.

We are still in an environment of negative real interest rates, inflation remains a threat, the banking system is under pressure, more QE seems likely – I could go on.

And as for the pound specifically, while southern Europe remains in focus, we have a host of our own debt-and-deficit-related problems that are yet to be dealt with. At some stage down the line, the bond vigilantes are sure to come knocking. That will be bad news for sterling in the long run. At times like this, gold is the stuff that financial lifeboats are made of.

In the short-term I suspect our friend the 144-day moving average (the average price of the last 144 days) will be supplying us with his usual support. He is currently residing at just above ,650 – and rising – and I suspect we will come back and say hello at sometime soon, perhaps even this week.

If we do pay him a visit, do him the courtesy of making a purchase – somewhere between ,650 and ,680 may well prove a decent entry.

So, to anyone looking to put new money to work, or anyone doubting their gold, I say the same thing I have been saying in this column for many years: stick your money in the yellow stuff and ignore the day-to-day fluctuations. This financial crisis and the bull market in gold are both far from over.

My latest gold report is now available – as well as looking at ways to buy gold itself, I’ve also tipped some speculative mining stocks that I think are poised to do very well in the coming years, and provided some updates on my previous tips. Get your copy of my gold report here.

This article first appeared in Money Morning, the free daily investment email from UK investment magazine, Moneyweek. Sign up here - it's free.