Three ways you could get shaken out of the gold market
Don't let the US Federal Reserve scare you into selling your gold, says Bengt Saelensminde. Here are the three signs that tell you when someone's trying to shake you out of a rising market.
Well that didn't take long!
It is practically one month to the day since I wrote to you saying that Ben Bernanke was bluffing. He'd stood up in front of Congress and said the economy was on a better footing. No need for any extra stimulus was the mantra. That is, no more quantitative easing.
The precious metals promptly plunged. Gold had been closing in on $1,800 and now it was freefalling past $1,750 $1,700 $1,650
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Was this the end of a gold bubble? "No chance" was how I put it... "Before long I expect our friend Mr Bernanke to have a change of heart. He'll be back at the printers before you know it!"
It has taken just four weeks for that to happen. Ben Bernanke has just hinted he could resort to more quantitative easing (QE). Speaking at the National Association for Business Economics conference in Washington, DC, Bernanke said that: "...the Federal Reserve's accommodative monetary policies, by providing support for demand and for recovery, should help, over time..."
Suddenly gold is on the way back up. The question is: did you stay in?
Because many investors won't have. There were certainly a few Right Siders who had pangs of doubt in recent weeks. And I don't blame them. It's not easy holding your nerve when the gold price is so volatile!
But that's what we have to do. Today, I want to show you three classic ways investors get shaken out of a bull market. And how if you can spot these three, you might keep your sanity as a gold investor during the bull years ahead
The power of misinformation
There are two sides to every trade: abuyer and a seller (or as they say in the City, "a muppet and his broker").
It would be naive to think that those on the other side of your bet won't try to, let's say, encourage a little bit of disinformation.
It's one reason I'm not very keen on following the financial news' in the common media. Who knows who's putting out what information and why? Sure, we should follow the grand overtures of the markets, but I don't get too bothered about the minutiae in the business pages it's either yesterday's news, or largely irrelevant.
Anyway, who's putting out disinformation on gold? Well, you don't have to be a conspiracy theorist to realise that Bernanke's Fed is on the opposite side of the fence on this one. The Fed issues its currency fiat dollars; gold is a competing currency. And who likes competition?
Around a month ago, gold (the competition) was getting ahead of itself;it was approaching the $1,800 level. Whack... down it came. Why? Because of our friend Mr Bernanke. He stood up (with a straight face) and told Congress things were looking up for the economy. No more QE necessary and therefore the gold bugs should go back to ground.
But, of course, we didn't believe him. And I suggested this was a time to top up on gold (or get in, as the case may be). And I hope you did.
But for many investors this pullback (on disinformation) will have caused alarm and pushed them out. This disinformationshook them out of the market.
And what's really galling, is that the Fed is prepared to go to remarkable lengths to spread this disinformation.
The Fed is breeding ignorance on gold
As if Ben Bernanke hadn't already muddied the waters enough, last week he launched another assault. This time at the George Washington University School of Business.
Rather than dummy' the market into thinking he was going one way (with QE), he was now trying to convince the public outright that gold is a bad, bad thing.
His message came across loud and clear. Gold is bad news. Gold is terrible as backing for a currency. He blamed all sorts of past demeanours on the poor old metal.
I can't go through all the details of his lecture here. But if you'd like to get an idea of Bernanke's message and see a fantastic rebuttal of it, then you should click here. I can heartily recommend hedge fund manager Paul Brodsky's critique of Uncle Ben's offensive.
It strikes me that the Fed is afraid of gold. And it's trying to deliberately make investors misunderstand gold's use.
Meanwhile, the Fed sits on hundreds of tons of gold in its vaults. And yetit tells everyone else it's useless and pointless. Ummm, I smell a rat!
But if you don't fully understand the investment you're making (be it gold, a stock, a bond, or anything), then you're likely to be easily shaken out. As with all investments, you really need to do your homework. Make sure you understand why you're getting in. That way you'll know when to get out too.
The most pervasive shaker...
Alright, so you haven't been fooled by the dummy move. You saw it coming.
And you totally understand the investment you're getting into. You know why it's in your portfolio as part of your long-term strategy.
But you can still get knocked out. Why?
Fear.
Greed is good (and frankly easy) in a rising market. As the market moves your way you feel vindicated in your position.
But fear is bad (and all too prevalent) in a falling market. It shakes confidence. It makes you sell when, in fact, you should probably be buying.
The very fact that prices rise or fall impacts behaviour. And that may be ok for short-term traders. They follow short-term trends and if the market comes off, then maybe they sell. After all, they may get back in tomorrow.
But, as a long term investor you have to take the opposite view. When something gets cheaper, you probably should be buying more of it.
Sure, you need to be confident you're not being sold a dummy. And yes, you must be certain you understand what you're getting into.
But if you are, then the price moves should work to your advantage. You can use price drops to top up. Or at least your knowledge will give you the strength to sit tight.
Those who know nowt are likely shaken out.
If you are just starting out as a gold investor, I recommend that you hold 5% to 10% of yourwealth in gold. You can find out more hereon how to buy gold.
And take time to read Brodsky's piece if you want to learn more about the competition between the Fed's currency and the real one (gold). Knowledge is power. It'll help you stay the course on this one.
This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.