How to ride the gold price rollercoaster

published 22 June 2006

The gold price has experienced a volatile couple of weeks. Don't expect things to get any better, warns gold commentator Paul van Eeden. As increasing numbers of bulls and bears take positions, the gold market is set for even more heavy turbulence. For his tips on how to keep your nerve and invest successfully

Gold fell $21 an ounce last Tuesday, only to bounce back $13 the following Thursday. I was quite happy when the gold price fell on Tuesday, thinking about all the stocks that were declining in price. During a bull market such downturns are profitable opportunities to snap up more shares of your favourite companies. That decline in the gold price was short lived and Thursday's bounce suggests that this week's opportunity had come and gone.

But, as I have been saying for a while, gold price volatility is going to increase. I expect to see larger one-day, one-week and one-month changes in the gold price than we have seen to date - both up and down.

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I received an email this week from a subscriber quoting a prominent banker who suggested that the gold price would decline to around $350 an ounce in the medium term. The subscriber wondered how to reconcile that with the claims of pundits who say gold is going to $1,000 or more. That is a good question.

I would pay more attention to the reasoning behind the forecast than to the number itself. Does the reasoning make sense? How does it fit in with my paradigm and opinion of what is going on? Does it present a new idea I did not think of?

No one can predict the future, and no economic model comes with a money-back guarantee. In the case of the gold market, you have to decide whether you believe gold is going up or down and be comfortable with your knowledge of why. It then becomes your opinion, not somebody else's, and your responsibility if you act (or fail to act) on your opinion. With time and exposure to new data and ideas, opinions (hopefully) evolve and may of course change, but they remain your own.

If you believe, for whatever reason, that the gold price is going higher in the medium to long term, and then the gold price declines, you can either sit back and wait for the price to resume its upwards course or you can average down the cost basis of your investments. If you believe that the gold price is ultimately going to $1,000 an ounce, does it matter if it declines from $570 an ounce to $450 an ounce?

Of course, if you are not convinced that gold is going to $1,000 then you might panic and sell your gold investments during a downturn, not only potentially taking a loss but also eliminating the possibility of gains should the gold price recover and ultimately reach your target.

On the other hand, if you believe that the gold price will not reach $1,000 an ounce and see the gold price rally like it has, then you may be inclined to take profits, or even sell short.

There are both bulls and bears out there, and as the gold price increases (or decreases) their numbers grow and their conviction grows. That is the fundamental reason why volatility increases.

I believe the gold price is going higher and therefore I am not alarmed when the price falls. Instead, I view it as an opportunity. But that does not mean you should. Nor does it mean the gold price will rise. What it does mean is that if the gold price falls dramatically and I lose a whole bunch of money I have only myself to blame.

First published on Kitco.com (www.kitco.com)

By Paul van Eeden