Is it Time to Buy Gold?
By Dr. Thomas Carr | June 4, 2015 |
My Grandfather was a very conservative investor. His investment capital was tied up in real estate, treasuries, the bluest of blue chip stocks, and gold. I remember well his argument for buying gold. “God only put so much of it in the ground,” he would say. “So it can only get more valuable.” For him, gold was the perennial answer to every financial problem. Inflation? Buy gold. Recession? Buy gold. A volatile stock market? Buy gold. A weak dollar? Buy gold.
Unfortunately, he didn’t live long enough to witness the great gold rally that began shortly after his death. From the $255/oz. spot price low of 2001, the price of gold (POG) rallied to an alltime high of $1,923 high of 2011. Over those 10 years gold averaged a whopping 65% ROI per year, far surpassing stocks and bonds combined. Silver nearly doubled that rate, of course, but it has never had quite the allure of the yellow metal. See the 10-year monthly chart below:
THE GREAT 10-YEAR BULL RUN IN GOLD
Look at the weekly chart of spot gold today and we see a very different story. The present story of gold is of a market in sharp decline. The POG recently dipped to near 1130, a drop of over 40% from the highs. This may be due to the stock market hitting new alltime highs, or the dollar’s rebound, or simply a lack of inflationary fear. Regardless, gold has been in a slump for the better part of three years, as the weekly chart below shows clearly:
3-YEAR SLUMP IN PRICE OF GOLD
So is this now the time to buy gold? With the POG near three year lows, and with stocks just under alltime highs, gold may well be the best bet for the second half of 2015 and beyond. Long-term buying opportunities in a major asset class like gold normally only come along once a generation. This may be this generation’s window of opportunity to own gold at a steep discount.
Here is the bullish case for buying gold now:
So how should we play an expected new bullish run in gold? If you are lifetime buyer of gold, there is nothing like owning the real thing. But today investors have several options that cancel the risks of owning physical gold (which can be lost or stolen). They are:
Like any investment, buying gold carries risk. There is the possibility that, having gotten all the bullish points correct, gold still moves sideways for the next few years, increasing your opportunity costs. It is also possible that the bulls are wrong, which would likely lead to a loss of capital for gold investors. Here are the risks in buying gold now:
So, if you do venture in gold, I suggest you go lightly, average in your costs basis over time, and don’t give up on stocks until you see the current uptrend violated.
Disclaimer: any forward looking statements in this article are for educational purposes only. No recommendation is being made for the purchase of any security or commodity. The author may or may not have a position in one or more of the companies or commodities mentioned in this article. Please understand that trading involves financial risk.