I am so tired of the rhetoric of the Gold Bugs:
*It's the last bastion against Armageddon;
*It's the only real currency;
*They're not making any more of it;
*Paper assets aren't worth the paper they are written on;
*China and India are buying up the world's supply;
Do any of these factors have any gravitas? After all, gold has risen from a fixed rate of $35 to over $1,100 today. A big maybe, but only if one looks out 50-100 years, well beyond most of our way too few "building and preserving wealth" years.
Gold finished 1970 at about $250. Richard Nixon ended the convertibility of the US Dollar into gold in 1971 and the price took off from there into the mid-$600's by late 1970's. But then gold spent the next two decades in a tedious decline into the end of the 20th century at just under $300 in December 1999. Quite the investment over 30 years. Not.
The new century was kinder to the price of gold, as over the first 11 years of the new century price excelled, reaching $1,920 in September of 2011. Now THAT was quite the investment. Unfortunately for the goldbugs, price turned south in mid-2011 and was just about cut in half to a low of $1,046 by December 2015.
The common denominators in this 50 year period of price gyrations was every one of the eight fundamental arguments set out above. Each and every one of buy and hold based exogenous arguments has been rendered impotent, a strategy of mediocre returns at best, and if you entered the gold market at or near the 2011 highs, a disastrous 50% haircut at worst.
The Risk of Buy & Hold
One of the key foundations of making money in the financial markets is to have a plan, a method, a system for managing your portfolio. The buyers and holders of technology stocks in the late 1990's suffered through an 80% decline in NASADQ, and in their portfolios, with some stocks becoming worthless in the first 18 months of the new millennium. The buy and holders of the solid, dividend paying financial stocks in 2007 saw their holdings drop by 50% from the 2007 highs through to the 2009 lows, with a number of "blue chip" financial stocks becoming worthless.
You just can't buy and hold..Period.
What Can You Do?
I am a trend follower, my methodology is to identify a trend and jump onboard for as long as the trend is in place. I have my means of identifying the dominant trend of any market and that methodology works across all stocks, ETF's and commodities. I simply draw a trendline based upon a mathematical analysis of historical prices and buy when price is above the line, and sell when price is below the line. The idea is to catch uptrends, get out when price turns down, ride the downtrend and go back long when the trend turns back up. Armageddon, currency wars, inflation, etc, carry no weight as they are meaningless and in many ways contradictory to the direction of the price of gold.
Here is a monthly chart of gold going back to the turn of the century, with just two major long term trends: The run up from the turn of the century to the 2011 highs, and the retracement of much of that advance into the December 2015 low. From there a bounce, but not quote bounce enough to turn the long term trend back up.
If monthly price charts don't provide enough "action" for gold investors, sub-dominant trends can be identified on a weekly price chart:
Note how neither the absolute tops nor absolute bottoms are identified in advance, just new trends indicating the ending of one trend and the beginning of an opposite trend, not at the exact turns but soon enough thereafter to get onboard or at least go to cash.
There are other techniques to identify dominant trends. A simple moving average crossover can be crafted that although may not be as efficient in identifying trends as those shown above, will at least keep the investor from buy and holding through a 50% (or more) decline. At the same time it will get you fully invested in gold for one of those eventual multi-year rallies. In other words, when seeking to identify major trends, find something that works, then trade it.
The Round Trip
Finally, lets look at the price of gold without any market timing, the buy and hold strategy so loudly pronounced by Gold Bugs and doomsayers everywhere:
Six years, $1,165 to $1,165, through the thrill of victory to the agony of defeat. Where to next?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: AllanTrends.com is currently Short Gold.