The Argument For Cheaper Gold

Richard Tarjeft

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…)

In September of 2011, gold hit an all-time high of $1923 an ounce. This was good news for investors, because it meant stronger currencies. Currencies backed by precious metals tend to be stronger and have more longevity compared to currency backed by national credit, as the German deutschmark crash of 1939 illustrated. However, as gold has continued to become more expensive to mine, refine, and manufacture into everything from jewelry to bullion, the production of gold has been bolstered.

Gold demand is varied in the current climate because of concerns about economic stability from Tokyo to Wall Street. Decreases in discretionary income can also curb consumer demand for gold. The recent plunge has temporarily increased that demand but can easily fade to pre-plunge interest levels. In addition, the ever-climbing price of oil means that the expense involved in the production of gold has soared. These two factors, lack of infinite demand and expense of production, have combined to cause a steep devaluation in the price of gold. Additionally, gold is not typically honored among private citizens as tender for legal debts. Their only recourse, aside from a pawnshop or reseller, is government tender. The gold trade, apart from the jewelry and computer industries, is largely reserved for governments.

Because gold is so intrinsically linked to every facet of money and finance, and hence modern human survival, the “gold standard” has become a ubiquitous phrase denoting excellence and security, such as a college professor who is considered “the gold standard” of his particular skill set. International economists, bankers, treasuries, and private investors monitor the gold standard carefully, because sudden drops in gold prices can result in a depressed market very quickly. Additionally, fluctuations in gold prices help to predict trends in the valuation of other commodities.

Political issues play a role as well, particularly in areas of intense geopolitical instability such as the Middle East. Even home-grown politics have an impact, though. The results of a presidential election in the United States or a Parliamentary run in the UK or Australia can cause prices to rise or bottom out quickly. Although these instabilities rarely last for more than a few weeks at the outside, they are an essential element of planning one’s portfolio and weighing the relative benefits of retaining what one has, selling, or buying more in direct contravention of conventional wisdom.

All of these reasons come together to explain why gold prices have begun to tumble. The question from this point becomes what investors will do with (GLD), the primary gold fund. If too many sell at one time, “flooding” the market, these shares lose even more value. If no one is selling or buying at all, on the other hand, these shares remain artificially stable, a state of affairs that of necessity has a very short projected stability span. The most likely result in such situations is a downward trend, unless a new stimulus is found for the twin essentials of production and marketability to consumers.

The maxim “buy low, sell high” applies as much in the precious metals market as in any other. Indeed, in this case, it may even be more important than ever to offload gold before the price tumbles much further. Economists all over the world are forecasting that gold could fall to the lowest rate seen since before 2010, roughly $1,000 an ounce. This means that gold can still be profitable, particularly for long-term investors who have been purchasing shares of gold for more than five years. Selling quickly and liquidating one’s gold portfolio requires timing and nerve, but can result in immense profits if one acts soon enough.

There is a converse argument, of course: Why not simply keep the gold shares I already have and wait for the market to rally? This is a valid point and deserves consideration. Precious metals tend to perform far better in the market over time than nearly any other asset with a set market value. This holds true across a number of economic strata, including across the continental markets, so the risk of retaining gold, while still present, is fairly minimal. However, for investors who are considering ways to hedge losses in other assets or to diversify their portfolios, selling gold shares remains a very practical option.

Overall, the investor who is considering selling gold must consider a number of factors. First, how much did the investor initially spend? This may be the most evident impact point, because it aims directly at the investor’s bottom line and liquidity. Second, what is the current climate in the locale the investor intends to trade the gold? Are the prices high enough to still net a return on the initial investment? Are prime gold traders suddenly shifting tacks to examine other assets, such as petroleum? If the investor attempts to sell at the wrong time or in the wrong market, it is entirely possible to lose a great deal of money quickly. The same applies if someone investing post-2010 bought many shares of gold in anticipation of ever-increasing prices. Finally, the most obvious problem is and remains that if no one is buying a given asset, selling said asset becomes virtually impossible.

Something the savvy investor will wish to consider is the effect of the dropping price of gold on the price of other assets the investor may have interests in. As most national currencies trade in tandem at least partially by precious metal, a sharp decline in gold prices necessarily means a decline in the value of currency. Monetary units like the U.S. dollar, the euro, and the yen stand to take some of the hardest hits. This, in turn, affects international banking and loans, such as the aid and community loans governments exchange. This could also be a signal that a worldwide deflation in other prices is in the offing.

One of the first lessons a seasoned investor learns is not to panic. Selling off shares of gold is a tactically and strategically sound option to provide insulation against tumbling prices, and also helps stimulate activity in the market. This makes any “reserve shares” an investor may elect to keep potentially more valuable, and allows the investor to effectively hedge against losing money if a sudden market rally occurs while insulating oneself against an even steeper drop in gold prices.

Given the overall financial climate worldwide, now is an excellent time to sell gold. While investors new to the market are likely to lose money, this loss will be far less now than it appears likely to be in six months, given the current rate of attrition in precious metals prices. This will also foster new opportunities for friendly competition among investors and stimulate the global economy. To get the maximal profit from your gold investment, consider selling now and buying back later at a more stable rate.


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The Art&Science of Trading Gold
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