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BookmarkGold continued its second day of gains in London, narrowing the largest monthly drop since June, as physical demand increased. Gold neared a 34-month low of $1,180.50/oz reached on June 28.
Gold in U.S. Dollars – 1 Week
There was more irregular price action in trading yesterday between 1800 and 1830 GMT. Gold had trended slightly higher in the afternoon and was trading at $1,244/oz prior to a sharp but very brief spike to $1,254/oz and then sharp concentrated selling saw gold fall by more than $20 to $1,231/oz.
The trading was unusual as foreign exchange markets saw no price movements of note, nor did the silver, platinum and palladium markets.
Contrary to frequent assertions, recent losses are unlikely to be due to the continual concerns of ‘tapering’. The U.S. Fed policy minutes released on November 20 suggested that an improving economy would warrant trimming debt purchases in the coming months. While U.S. economic data this week showed jobless claims unexpectedly decreased, the data has been mixed at best and the U.S. economy continues to struggle.
Buying from China, set to become the world’s biggest buyer of gold this year by a long way, picked up this week as prices continued to be under pressure. On Thursday, traded volumes of 99.99 percent purity gold on the Shanghai Gold Exchange hit their highest in seven weeks and Chinese gold premiums closed at $26 with Shanghai gold closing at $1,267.82/oz.
Russian bank VTB said overnight that it has begun exporting gold and silver bullion to India to expand its business in the Asia Pacific region. Indian demand for gold remains very robust and is so strong this wedding season that the short supply is forcing families to melt down and recycle family heirlooms.
Momentum and technical traders are dominant at the moment and with the short term trend down, gold may incur further losses in the short term.
Despite the very poor sentiment after recent price falls, gold’s fundamentals are actually quite sound.
Global physical demand is set to be very high again this year and may even reach a new record, despite the 25% price fall. This is especially the case, as Chinese demand is set to have new record this year despite the recent slight decline in demand. China’s net imports of gold from
Hong Kong alone in October reached the second-highest level on record last month. This does not include direct imports from Australia, Africa, Vietnam and other countries.
Indeed, Chinese demand this year looks set to be a new record for the highest gold demand from one country in one year ever. It is important to look at the aggregate annual demand figures rather than the ebb and flows of weekly and monthly data which can mislead.
Despite what is likely to prove short term weakness, the smart money is gradually accumulating on the dips. Dollar cost averaging remains prudent for buyers who wish to have an allocation to bullion but are concerned about further price falls.
“Is This The Right Time To Get Into Gold?”
Slow But Steady – Dollar Cost Averaging Remains Prudent
“Is this the right time to get into gold?” is a question we have been asked by clients and the public nearly every day for the last 10 years.
“Prices have gone up too much. I’ve missed the boat” was frequently how many of the public answered their own question. This was often the refrain, especially in the period from 2006 to 2010 when gold prices rose from $500/oz to $1,400/oz.
We first heard those concerns in late 2005 when gold prices rose to over $500/oz. One caller was adamant and said “I am not buying gold after its price has doubled in just 5 years”.
Gold in U.S. Dollars – 10 Years
More recently, the frequent refrain has been “prices are falling as the gold bubble has burst and gold is a bad investment.” And indeed, “I am not buying as gold prices are down 25% this year and 35% since the record high in August.”
These are understandable concerns. People do not want to lose their hard earned cash buying something that will fall in value.
However, there is a way that one can invest in or buy gold and sleep easy at night knowing that you do not have to be concerned about price falls. There are rarely free lunches in life, and that is particularly true when it comes to investing and saving.
However, there are two free lunches when it comes to investing. They are diversification or not having all your eggs in one basket and secondly a less well known but important strategy -
Dollar Cost Averaging (DCA).
Once you have learned about the power of dollar cost averaging you will be a better investor and a better gold investor and buyer.
Dollar-cost averaging or pound or euro cost averaging means putting the same amount of dollars, pounds or euros each month into an investment or asset, such as equities or gold. That is all it is.
Why put your hard earned cash into physical gold every month?
Because gold, while having bad days — even bad years as we see this year — goes up over time. When you accumulate a set amount — say 100 dollars, pounds or euros per month — your paper currency will buy you fewer ounces of gold when gold prices have risen, and more ounces of gold when gold prices are lower.
When you put dollar-cost averaging to work, you can relax, knowing that you don’t have to track or time the market – which even the professionals consistently fail to do.
Buying gold in a falling market sounds easy, but most people don’t have the stomach to do it. This has been seen graphically seen in recent months – particularly in western markets where sentiment is negative towards gold.
In fact, the gold market like many traded markets is the only place where people seem to get more interested when the prices are rising sharply. They are less interested when gold is “on sale” after falls in price.
This was graphically shown in 2011, when despite gold becoming overvalued when it surged from $1,500/oz on July 1st to over $1,900/oz on August 28th or 26.6% in less than two months.
Gold in U.S. Dollars – January 2011 – January 2012
August 2011 was a time to be cautious and not “pile in” after huge price gains. A strategy of dollar cost averaging at this time would have protected buyers from the subsequent price falls and the price falls of recent years.
Dollar-cost averaging is easy to understand and even easier to do with gold in gold accumulation programmes. It will have a positive long-term effect on your portfolio by helping you to achieve diversification with safe haven gold.
The slow and steady approach of dollar cost averaging in gold accumulation programmes such as GoldSaver remain a prudent and wise way to accumulate gold. GoldSaver was the first gold accumulation programme in western markets. While Gold Accumulation Programmes are popular in Asia – in Japan and more recently China and India, they were not known in European and American markets.
Some argue that using dollar cost averaging is the sensible approach to investing in precious metals, because for many investors jumping headfirst into gold seems like a risky strategy.
What do you want from this strategy?
The objective of dollar cost averaging is to avoid a sudden fall in the value of your investment or asset soon after purchase. The thinking behind it is that by gradually moving your money into an investment, you can avoid large losses. This is a good idea, as all markets including the precious metal markets are volatile – and they look set to get more so.
Often it is argued that the logic behind dollar cost averaging is turned on its head when it comes to investing in precious metals. Because gold and silver are purchased mainly for portfolio diversification and as a long run inflation hedge, many believe the best strategy is to buy your protective metal in one go, and then forget about it – you know it will rise to the occasion when you need it most.
True, but since the whole idea behind holding gold in the first place is to protect against a market crash, systemic crisis or currency devaluation, any steps you have taken to shield your wealth will be beneficial. Think of it this way: if there was a high possibility that contents of your house were about to be robbed, does it matter whether you pay your home insurance in instalments or as a once off lump sum?
This is especially the case for smaller investors who cannot afford a large lump sum investment.
Also, it is better to have some insurance rather than none. With gold, you can purchase a small lump sum and then dollar cost average with the rest of your position.
Dollar-cost averaging is all about minimizing large losses, and is normally used when an investor has a strong suspicion the market will move up but doesn’t want to commit too quickly.
However, dollar-cost averaging can also be used in conditions where the market is expected to go down. Precious metals move in the opposite direction from the market, which is the precise reason why investors should hold them in a portfolio. When it comes to moving your money into this asset, it’s not about the traditional taking on of more risk for a higher reward; rather, it’s about building up the protection you need if stock or bond markets take a nosedive. Most of our pensions remain allocated almost exclusively to just equities and bonds.
The greatest benefit of using dollar-cost averaging with precious metals is that it allows less sure or confident investors to advance carefully into new territory.
It is consistently the case that at the times we are most likely to need insurance we are least likely to have it. Human nature dictates that the most difficult time for us psychologically to cough up a chunk of cash to protect against risks is when everything seems to be ticking along just fine.
This is especially true for the majority of us who are trying to make money, rather than simply hanging on to a large amount of wealth generating assets.
However, dollar cost averaging is not just for smaller investors or buyers. We have wealthy clients who we have advised to gradually accumulate a position over a period of months. One client bought $100,000’s worth of gold bars on the 7th of each month for 7 months. He likes the number 7.
Today, the case for using gold as a protective cover or financial insurance cannot be understated.
With markets chugging along on a veritable life support system, and each round of QE prolonging this degenerative condition at the expense of us all, there has never been a better time to gradually move your wealth into the best financial insurance out there – gold.
