Is now a good time to buy gold?

“If you are going to panic”, I’ve heard it said, “Panic first. You can investigate later.”

Gold had another one of its bad days yesterday. It fell some $30 or $40 an ounce, depending on when your day began. It fell another $13 overnight.

But now really is not the time to be panicking. If you start now, you’ll be very late to the panic party.

In fact, if you have been looking for an opportunity to increase your exposure to gold, now could be the chance you’ve been waiting for…

Gold is consolidating after its 2011 excesses

My longer-term prognosis for gold remains unchanged.

When gold has one of its big run ups, as it did in the periods to May 2006 and February 2008, afterwards, it goes through a lengthy period of consolidation. It’s trying, it’s frustrating, but that’s what it does.

Eventually it gathers impetus again, challenges the old high and, after several attempts, breaks out. The old high then becomes support. But it is many months – sometimes more than 12 – before we challenge that old high.

Gold is now in consolidation mode after its 2011 excesses. It will be many months yet before we break out to new highs. But we will. And two or three years after we do, gold will have another big run-up and sell-off and that $1,920 figure will be the line of support – just as both the $700 and $1,000 have been.

We still have colossal monetary stress, unpayable national debts, negative real interest rates and central banks that – despite yesterday’s jawboning by Federal Reserve chief Ben Bernanke – have gone beyond the point of no return on the money-printing path.

He is not printing at the moment because he doesn’t have to. US stock markets have been the stellar markets. They won’t be forever.

In the meantime, I’d like to introduce you to another moving average, one that’s worked particularly well for gold over the years. You may remember how well my 144-day moving average worked in the period from 2009 to late 2011. Well, now I’d like to tell you about the 252-day moving average.

When gold hits this line, it’s usually a good time to buy

I use the 252-day moving average because there are usually 252 trading days in year, so, in effect, it shows the average price over the last year. (My thanks go to author and trader Michael Hampton for alerting me to this).

Here we see gold from 2001, when the bull market began, to 2008. The red line underneath is the 252-day moving average.

You can see that throughout that seven-year period, gold repeatedly came back to it and found support there. In other words, it consistently marked an excellent entry point.

Gold price chart

These things don’t work forever, however, and in 2008, as the world panicked (did you panic first?), gold got too far above the moving average, and then for a few sorry months in the latter part of the year, the price plunged through it.

From 2009 it hardly worked at all. Why? Because it didn’t have to.

From spring 2009 to late 2011 gold, such was its strength, never went back to its one-year average. Instead it consistently found support at the 144-day moving average – the green line on the chart below. The ‘irrelevant’ 252-day moving average is in red.

Gold price chart

But in September last year, as we all know, gold went too far too fast. 

One casualty of the subsequent wash-out has been the 144-day moving average (we are currently sitting below it). It is, for the time being, no longer an effective tool.

But, joy of joys, our friend the 252-day moving average has risen from the ashes. It now seems to be offering gold the support it so badly needs. Here’s a one-year chart of gold with the 252-day moving average underneath. We’ve just slipped through it overnight.

Gold price chart

The 252-day moving average, I’ve found, is more of a ‘rough guide’. It doesn’t nail the exact lows in the way that the 144 did. You can see we slipped through for a few days in late December. But, over a longer time frame, it’s acted as a good point to be dripping money back in.

Will it continue to work? My bet is that it will.

I said a few weeks back that gold looks like it wants to go back to $1,600. I thought we had seen the low last week and that we were on our way back to $1,800. It looks like I got that wrong and that $1,600 has to be visited first. We’ll see.

I’m not sure, as some suggest, that Bernanke is out to deliberately suppress the price of gold. But he has said before that he has the gold price on his screen and watches it every day. 

Does he want the gold price to soar? Of course not. But read his work, look at the measures of inflation he uses, look at what he actually does – he is a keen proponent of monetary stimulus. As Marc Faber would say: “he’s a money printer”.

Gold has gone back to its one-year moving average. Every time it’s done this bar a few months in late 2008, it’s not been a reason to panic. It’s been an opportunity.

So my message to you today, in case you haven’t already got it, is sit tight, stay long, stay strong, and be patient. The bull market isn’t over.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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  • David

    Thank you for your gold wisdom and humour always Dominic. I’m no stranger to the panic but you usually calm me down a bit.. Not always.. But knowing how much of your purse is in gold I’m not surprised. Chris Webber was talking about buying at under 1000 and making another fortune, but maybe we won’t have to go through that trauma.. All the best, David

  • Mr Ernest Braimah

    Great write up as always. Your insight on the subject matter is second to none. Just wondering where you buy your physical assets from.
    At this point in time, would one be better off holding physical assets or etfs or shares..
    best wishes

    Ernest

  • Petr

    If the 252 day moving average doesn’t work what is the next number?
    However, I am happy to go with you on this.

  • Bob

    I think gold and silver have some way to fall yet before they shoot back up when more QE comes.

    Dollar is getting stronger.

  • JREwing

    I sold all my Sterling and coverted to US Dollars last week. Time will tell if this was wise move.

  • Kingbingo

    I agree…….I just don’t have much spare cash to buy gold with :(

  • Alberich

    …..just keep accumulating, focus on the oz. you hold not the £/$ price. Also know the difference between value and price. Relative to FTSE and Dow, gold is still cheap.

    When FTSE: Au ratio is around 1:1 that is when gold is rel. expensive. So gold would have to rise to £6,000/oz and FTSE stay roughly where it is now. Or FTSE fall to say 3,000 and gold rise to £3,000/oz.

    Given the money printing by BoE and the Fed, the 1st scenario is more likely, I believe.

  • Chester

    @5 – I agree it is a smart move JR. Positioning into cash will prove a good call if a deflationary grip tightens

    A small minority (of which I am one) believe all asset classes will revert to mean, including gold, when it finally dawns that the Feds cannot monetise anything like the value of the credit destruction still to unfold. I agree gold will have it’s day, but not anytime soon. Some forecast the next major support line around $1,300, not $1,600, and that a bottom below $500 will be the time to buy

    Time will tell

  • Steve

    The bank holiday is coming up – seems likely that the traders wil take this opportunity to push the gold price down.

    @5, as a matter of interest, did you convert your £ into a $ currency holding within a cash account, or did you eg use a GB£US$ ETF? Thanks

  • Tom O’Neill

    Dominic, no problem with gold (and I have no qualms about holding etfs such as PHGP and PHAU either). But what about gold-mining shares, which have plummeted and re-rated, now shadowing gold but well below it? From being very bullish, you’ve gone very quiet on them…
    I think they rate a separate study from you soon – please.

  • JREwing

    @8 Chester – I don’t believe there will be widespread “deflation” but there will be “deflationary” bouts and we are on the verge of one of them. All the central banks have opened the spigots the last few months and what is the result? Record high petrol prices. Higher petrol prices are a disaster for the consumer – I think if one focuses on this little bellweather, it becomes obvious that the housing market cannot go up if consumers are completely tapped out due to higher food and energy costs. So in the meantime I think everything will come down somewhat (including gold). But the worst thing to own is Sterling – you get killed whethere there is deflation or inflation. If there is deflation, Sterling weakens on fear of global recession, if there is inflation Sterling loses value.

  • JREwing

    @9 Steve – I simply transferred my Sterling into a US Dollar account and converted it into US Dollars where I will hold it until there is some kind of near term crisis.

  • Segedunum

    Why panic buy? Just buy a small amount every month, whether it be 1/10 of an ounce or whatever. I don’t pay attention to trying to predict the spot price any more. I just cost average in small amounts.

  • Segedunum

    JREwing: Considering that the value of the dollar is falling all the time, even in relation to other currencies that are themselves falling in value, no, it wasn’t a wise move. The Fed constantly has its finger hovering over the printing press, the dollar as a world currency is the weakest it has looked for many decades and the rising price of oil is not down to Middle East tensions but the weakness of the dollar.

    Whatever deflationary dip we might have will simply be due to a contraction in the currency supply as people stop spending and stop creating credit. That won’t stop central banks from constantly printing, nor the effect of that printing to filter down to us. On top of that, indebted governments and central banks simply cannot afford deflation. Remember, deflation and an increase in the purchasing power of a currency is bad for those in debt and bad for exports.

  • Kingbingo

    @Chester
    “Feds cannot monetise anything like the value of the credit destruction still to unfold”

    I would be interested to understand why you think the Fed cannot monetise enough. After all, its not even like they actually need to print off the bank notes these days. All they need do type the number into a computer, hardly difficult. The only hurdle would be how to deploy the money after you had bought back the entire $15tr US debt, but they would come up with something like special loans to the banks.

  • JimBob

    I saw a report on Bloomberg that said there is going to be decreased demand from gold retail buyers in Indian due to a tax increase.

    Anyone have any thoughts on this??

  • Gordon Freeman

    Well done to the FOMC and the MSM for pushing the prices down again, bravo! But whilst the speculators sell and the commercial short positions reduce to ever lower levels, what happens next? Are the commercials readying to buy soon (at a discount) once the specs have been fleeced? So much of the price is dictated by the COMEX in America, the quoted price isn’t a true reflection of the world market.

    Add to this the absolute zero activity in India due to the jewellers’ strike and no wonder the price is tumbling. Are they due to go back to work soon? Their April festival is coming soon, there will be uproar if they can’t buy then!

  • MKS

    How about ask folks at Efiko Group what they think about golf as investment? There is free discussion on 6.4.: http://efikogroup.blogspot.com/2012/04/q-session-on-642012-about-economic.html

  • Graham

    Hi Dominic, Can you please tell us where you get your 144 and 252 chart? It would be nice to be able to monitor this.

  • John
  • Barry O’Dwyer

    Undoubtedly gold and silver are going to have a field day soon enough. I am not sure if it is relevant to specify a price they might reach because at the point gold reaches USD 3,000/oz. a loaf of bread is likely to cost USD 10. The fact is though that, unlike fiat currencies, gold and silver will hold the true value of our assets when everything else goes up in a massive inflationary spiral.

    What we should be asking ourselves is whether USD 1,618 or so we saw on 4th April is going to be the bottom for gold in the short term, or whether it will first head on down to around USD 1,580 or so before finding support.

  • Anthony from Cape Town

    What bothers me are the huge reserves of gold held by USA, Germany, France, Italy, etc (Britain obviously now irrelevant since Gordon the financial Genius flogged ours off for a song). We know our glorious leaders don’t want us to own gold but to leave it in the banks earning peanuts to prop-up the collapsing monetary system. So the worry is this – when a lot of ordinary people wake up and climb aboard the gold bandwagon, our glorious leaders will get together and secretly plan a huge sell-off to teach the “little people” the lesson that Gold investment is risky and only to be played with by the big boys. The IMF sold off a lot in the late 1980’s in order to cripple the (white-ruled) South African economy – it worked didn’t it?

  • Steve

    Looking at charting software, the ‘UK Inflation’ index rose three-fold in the ten year period from 1975 to 1985 – high inflation meant that the fiat price of things in 1985 was three times what it had been ten years earlier. Anyone who had saved cash from 1975 to 1985 would have found that it only purcahsed 1/3 of the goods that it would have bought ten years earlier. Scary. Could it be similar this time round?

  • Network Marketing

    We all know that you won’t get rich by directly selling coffee products to your warm market. You need to reach the top position of the company to make millions of dollars each and every month. In order to achieve this, you need to recruit at least two people in the system. Then they would need to recruit and so on and so forth.

  • alvin payne

    Thank you for the advice. The key is to buy at the right time, and in the right place. I think we all know that. It really depends on your location and the income that comes through, unless we talk about deals online to buy gold or buy silver. Great blog. Keep it up.

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