It's never a good time to buy gold. Ever.
I may not be able to do adaptive formation equations or rebuild an engine block, but I have learned a few lessons in my time on this earth. I’ve learned that no matter how thirsty you are, don’t try to open a beer bottle with your teeth. I have learned that when your 4 year old looks pale and says “My throat feels funny” you better get her out of your car immediately then stand back. You know… life wisdom.
What I’ve also learned is that it’s never a good time to buy gold. Ever. Here’s why:
1. Central banks are always selling gold, and nobody is ever buying it.
The financial press loves it when central banks sell big hunks of the barbarous relic. This is always Big News, and is given prominent play and headline status. Apparently, the press believes that people love to read all about how their governments have so much of this dusty metal from a bygone age just lying around taking up valuable space that they practically give it away, and in huge batches too!
“The Bank of Spain has cuts its reserves by 108 tonnes from March to May, representing 25% of its total reserves. Finance Minister Pedro Solbes told to the Spanish parliament last week of his intentions "to sell gold, an unprofitable asset, to reinvest in bonds, which are more profitable." (Reuters, June 2007)
Funny thing, though- for any financial transaction to take place, don’t you need a seller AND a buyer? Wouldn’t finding out who is buying all that gold be fully half the story, and just as big a deal as who is selling? Apparently not. It seems that the question of who is buying all that gold is irrelevant, because the press never mentions it! This phenomenon was commented on 20 years ago by legendary Swiss banker and gold analyst Ferdinand Lipps: “Sellers of gold are always made known. In some cases even three times: first, when the sale is announced; second, when the sale actually takes place; and finally, when the sale is completed. The buyers, however, always remain anonymous.” (Lipps, Gold Wars, p.132)
“The Swiss National Bank surprised the gold market on Thursday with plans sell 250 tonnes of gold reserves over the next two years. With major gold sales already this year from Spain, France and the ECB, some analysts believe higher gold prices could lead to more sales by central banks.” (http://www.resourceinvestor.com/2007/06/14/switzerland-central-bank-to-sell-250-tonnes-of-gol )
So I must conclude that if the brilliant economists running our central banks are selling their gold, then it is obviously a bad time to buy… and the press assures me that central banks are almost always selling gold. And apparently, nobody ever buys it.
2. If gold is going up, it is too expensive and you shouldn’t buy.
When I first started wandering through some PM internet forums, I kept seeing the same refrain popping up over and over again. I started to think of these posts as “Krugerrand guy”. People would be talking about the pullback to $700 and discussing whether to buy or wait for lower prices, and someone would always chime in with some version of “I bought my Krugs at $300 ten years ago, no way I am buying at these prices”. These sentiments, it seems, influenced quite a few people because you could always find posts saying that gold was too expensive “at these prices”, no matter what those prices were. And the further it rose, the more expensive it became so I would think that every time price went higher, these folks found the idea of buying even more repellant.
The obvious conclusion is that you should never buy into a rising market, because if price is going up then gold costs more than it did just a little while ago, therefore you are paying too much. The internet said so.
3. If gold is going down, it could always fall further, or might even be entering a bear market, so you shouldn’t buy.
Not only is it ill-advised to buy into a rising market, it is a bad idea to buy into a falling market, too! When prices are lower, it clearly means the market has already topped, so even lower prices must be on the way. It might even be a bear market. Heck, it might even be a secular bear market (which is just like an ordinary bear market but with huge fangs and enormous claws and… well, it’s just very scary). Falling all the way from $1,900 to $1,300? No matter how far gold has fallen, at any given time it could fall even more. Remember, the trend is your friend and the trend is down, so when price is falling it’s a bad time to buy gold. The internet said so.
4. A respected Citigroup (or Morgan Stanley, or Schwab, or Goldman) analyst doesn’t recommend buying gold right now due to ‘market conditions’.
Nov 29, 2007 (Reuters) - Investors should sell gold in 2008 to take advantage of falling prices as the dollar steadies, Goldman Sachs said on Thursday, naming the strategy as one of its top 10 tips for next year. The bank expects an easing of the fears that have paralyzed credit markets. It also sees the dollar trading more steadily than it has this year. These trends would lessen the safe haven appeal of the precious metal. "We would now use a short exposure in gold, expressed in US Dollars, to capitalize on a gradual relaxation of credit concerns in the financial sector over the coming months, and as an avenue to benefit from the prospect of a stabilization in the US Dollar," Goldman Sachs said. (link)
You can totally see what these guys were talking about in this chart: look at how gold quickly shot up (clearly irrational exuberance by those stupid gold bugs), but THEN it topped out and lost all its momentum. The “market conditions” were not going to be favorable to gold so it was a good time to sell, or maybe even go short:
Top Ten Tip indeed, telling clients to sell their gold in November of 2008 (and at that time, Goldman had some sweet Mortgage Backed Securities you could flip that money into, too). Here is the longer term chart showing the pain those clients would have had to endure if they had kept their gold, against Goldman’s recommendation:
Wow, is it just me or do those two charts look strangely similar? Oh, never mind- it’s just coincidence, I’m sure.
The point is, these analysts from the big Wall Street companies do this for a living, folks. They are professionals and have access to the finest information and institutional resources available, so you would be well advised to do what they tell you. They rarely mention gold at all but when they do, you will notice that they usually recommend selling it due to “market conditions”. I must therefore conclude that “market conditions” are not favorable to gold. Ever.
. . .
From all of this, I have learned is that it is never a good time to buy gold. When price is rising, you don’t want to buy because it’s too expensive. When price is falling, you don’t want to buy because the trend is down, and it could always fall farther. Additionally, central banks are regularly selling their gold and apparently, nobody every buys it. And the professionals, who manage investments for a living, do not recommend it because, well, “market conditions”. When you really get right down to it, there is never EVER a good time to buy gold.
But you know something else I’ve learned? Whether price is rising or falling, if you don’t buy gold, well... you won’t have any. Funny how that works, isn’t it?