When is the best time to buy gold and silver? When the prices are pulling back.
What do most people do when buying gold and silver? They buy when the prices are taking off.
It is this mentality that I wish to “re-frame” in this article. The time to buy gold and silver is when the price is falling, contrary to say buying the stock of a company where the price is falling. Why? Because you will see the multitude of reasons the price of gold and silver will be much higher in the future, whereas with a company whose price is falling, it takes a return to profitability to get its stock price moving higher. The whole world is chasing gold and silver as their currencies implode.
Summer Duldrum’s In Action?
The summer pattern of lower prices for gold and silver may have finally started today as the dollar was up about 1% on word that Bernanke is playing down any potential QE3. Bernanke is good at talking the talk, but in the end, he always resorts to the only thing he knows in stopping deflation, and that is more QE. So expect more QE in the future.
Seasonality is an important part of trading silver and gold. Historically, prices have risen during the last three months of the year and into the first five months of the following year, while the summer months have seen silver prices decline. Whether it is people doing other things, like taking vacations, investment demand decreases during the summer months. Knowing this, a trader can be a little biased in trading the direction. The following chart shows the 40-year and 15-year seasonal pattern, followed by a chart of the 2000-2009 pattern showing the summer historic summer doldrums for silver. This is a pattern that has been consistent and one a trader can profit from utilizing. As the economy deteriorates, however, this pattern could become less reliable as silver garners more strength the full year rather than taking the summer off. The same would be true for gold.
The Mentality of the Average Investor
Before being able to critique anyone, one must have had experience observing what people know about investments. I have spent approximately 25 years listening to what people know about investing. The truth is, not much. Our education system is set up as such where most younger people don’t learn much about investing. The same goes with college age students. As we progress to adulthood, we end up relying on a financial advisor, banker or insurance agent for advice on where to invest one’s money. They always try and tell you to put your money in stocks, bonds or possibly some in REITs or international funds. All in all, there isn’t much in one’s portfolio that counteracts the fall of the U.S. dollar. Most of these advisors don’t sell physical gold or silver. They were never taught anything about them in their tests or from their peers except that they are a “risky” asset that sits at the top of the investment pyramid (commodities). But the last 10 years, gold and silver have moved up in price every single year, and your advisor hasn’t put you in them. What else besides Treasury Inflation Protected Securities (TIPS) counteract the U.S. dollar risk for; U.S. stocks, U.S. corporate bonds, U.S. government bonds, U.S. CD’s and U.S. Treasuries? While TIPS have some hedge against a falling dollar, they will lag any forthcoming inflation and their returns are already skewed by a government that doesn’t like to pay out Social Security payment increases to seniors as they have reconfigured what they think constitutes inflation over the years.
Gold and Silver do two things for one’s portfolio. They act as insurance against the credit contraction that is occurring as a “safe haven” against potential bank defaults and protect one’s portfolio from future Quantitative Easing by the Fed.
- S&P, Moody’s Warn On U.S. Credit Rating
- Double dip in housing is almost here
- Commercial real estate loan delinquencies are rising with more problems ahead
- Government spending is still what’s propping up GDP
- Banks have more sub-investment grade derivatives than at the height of the financial crisis
- Manufacturing recovery dies in terms of unemployment
- The American Recovery and Reinvestment Act (more stimulus) is only a temporary solution and funds are almost depleted
- U.S. States continue to face large budget gaps
- Despite seasonal job growth, future employment looks dim
- Pension plans are underfunded
- FDIC is still over $7 billion in the hole while banks keep failing
- Medicare is gaining 7,000 new 65 year old baby boomers a day
- Military spending is out of control
- We are now involved in wars or bombing Syria, Libya (via UN), Pakistan, Iraq and Afghanistan with no declaration of war by Congress
- Insert unsustainable issue here (there is a reason why they are rioting in other countries
What Is Sustainable?
- Quantitative Easing. See my article: 4 Reasons There Will Be Future QE And A Higher Price For Gold and Silver
- Idiocy of Congress
- A complicit media to keep you distracted from what is really going on (What’s the latest trial they have you following? – Why is that do damn important to us?)
U.S. Dollar Bouncing
In my May 5th article 2011 Gold and Silver Prices Falling Nothing To Panic About – Decline’s Always Occur, I said the dollar could be in for a bounce which would put pressure on gold and silver.
Here is what I had to say;
With all of the above going on, the U.S. Dollar is likely to bounce. Why? Because of what it is priced in;
- the Euro has major issues with the PIIGS (Portugal, Ireland, Italy, Greecce, Spain)
- the Yen has catastrophic calamities to deal with and already led the world with the highest debt to GDP ratio
- the Pound has major austerity issues that are not working despite good intentions
As the problems escalate in other countries, the U.S. dollar could benefit. This also fits in with my deflationary credit contraction analysis where illusions of wealth (derivatives, real estate, stocks etc.) chase perceived wealth (U.S. treasuries and U.S. dollars) and real wealth, gold and silver. In fact, both treasuries and gold and silver have been strong because of this.
Ask seniors and they still will tell you treasuries are safe. It is the perception they have had for decades. But I can bet you 999 out of 1000 seniors haven’t viewed the Fed’s balance sheet which used to consist of 80% treasuries and now only holds about 20% as they have had to bail out banks, businesses and their other favored sons.
But it’s just the beginning stages for gold and silver. We are still in the second and longest stage where the bull will try and whip the weaker players off it’s back. Things will deteriorate in other countries before hitting the U.S. shores. They will be buying gold and silver too.
While the dollar bounces, and treasuries stay strong, gold and silver are simply going to take a breather. This is the time to dollar cost average into a position and actually “hope” the price falls further so you can obtain a better overall price. As I said in the above quick answer; “our government virtually guarantees the future price appreciation.”
Dollar Cost Average Into Gold and Silver Strategy
To Dollar Cost Average into anything, you have to have conviction that the asset will move higher in price. What you technically don’t mind is that asset falling in price in the short term so you can get an overall better price. What this means for physical gold and silver, is you buy some of the metal today at whatever price it is trading at. You then periodically buy more in the future at set periods or when you see pullbacks. We have had a recent move higher in gold and now it is trading close to its 50 day moving average.
When gold and silver get to their 200 day moving average, if they get there, it is a perfect place to buy. Will the price go lower than the 200 day moving average? Sure it can. It should be welcomed if it does. Holders of physical gold and silver don’t care if it falls 20% on its way to 100% or more in gains. But I don’t think it would fall much further than the 200 day moving average because of all the reasons mentioned above. But for now, we have the end of QE2 and no QE3 in site and we have a stronger dollar. Gold and silver are simply taking a breather before their next leg up.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.
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