Three reasons to buy gold now

Gold coins © Getty Images
If you’re looking for a chance to top up your gold, the market is giving you a good chance to do so

I bought some gold in my trading account yesterday.

I’ll tell you the three reasons that persuaded me to go in.

Then you can tell me whether you think I’ve made the right call or not…

Reason No.1: I like the chart

Some of you pay heed to charts. Some think it’s hocus pocus. Each to their own. I like them.

There a couple of things I like about the gold chart.

First, gold seems to have found a temporary low. The sell-off has been violent, but things have stabilised around $1,250 an ounce. There hasn’t been much of a bounce, but nor have the sellers followed through and taken gold lower, when the chart looked vulnerable. The $1,240-$1,250 area seems to be one where gold finds support.

But here’s the clincher – the relative strength index (RSI). Below is a chart showing the price of gold over the last three years, with the RSI underneath. You don’t need to understand what RSI is – I’m not even sure I do. All you need to note is that every time the RSI has fallen below 30, it has provided a tradable low.

I’ve circled each occasion in red.

Gold price chart

The RSI has just gone below 30 once again. Is this a tradable low? I’m speculating that it is. But, in case I’m wrong, I’ll use a stop, currently just below $1,240.

The chart above only shows the last three years, but you can go back much further. When it comes to spotting intermediate-term lows, RSI below 30 is a reliable indicator.

I stress: I regard this as a tradable low with a one-to-four-month timeframe. It is not necessarily the mother of all buying opportunities.

There are other technical indicators, which are also looking promising. I’m particularly keen on the moving average convergence/divergence (MACD) readings, though I don’t have final confirmation on them yet. I’m not including them here in the name of simplicity.

And, by the way, this is the dollar price of gold I am trading. Sterling’s demise these last few months has made me mightily appreciate the importance of gold in a portfolio, but I am less excited about gold’s short-term prospects in sterling terms (I suppose that means I am more bullish on sterling than I am on the US dollar). Happy to be proved wrong on that though.

Reason No.2: interest has dried up

Mining requires a lot of capital. At the speculative end of the market, most mines do not make money. They burn through it.

Companies that are exploring for something do not make money, unless they find something. But they spend it exploring.

Companies that are developing a discovery do not make money. They spend it.

Companies that are building a mine don’t make money, though they sure do spend it.

And even companies that are actually operating producing mines do not always make money.

When metals markets are strong, everybody wants a mining company or 22 in their portfolio. Producers are profitable. Potential mines have value. Deals are everywhere. Share prices rise.

When markets are weak, nobody wants to know and the deals dry up.

But when the deals dry up, that’s a buy signal. From late 2015 to early 2016 there was nothing going on. Nada. What a buy signal that was.

By the spring, deals were everywhere. Your Aunt Mabel could have raised money last June for that gold mining prospect she has in her back garden, just to the right of the compost bin.

Now deals are few and far between again. It’s nothing like as dried up as it was at the end of 2015, but the frenzy of the spring has abated.

It’s not just mining deals though. This is just one symptom of a general lack of interest in gold at the moment. Trading volumes are down. Open interest in the futures exchanges has gone down. There is a distinct apathy on social media. Even the number of Google searches which include the word “gold” are down.

I take that as a positive.

Reason No.3: the time of year

Seasonal patterns are, generally, only a secondary factor for me. But within that, every year, almost like clockwork, we seem to get a big shake-out in September and October. That shake-out often provides a tradeable low.

We just had a shake-out. Gold was $1,350 in early September. Now it’s $1,250.

Below, via chart wrangler Nick Laird, is the seasonal chart. It shows what gold typically does each year, based on the month. You see the October sell-off you typically get? Have we just had it? If so, November is rocky and then the running is pretty good.

Gold pric e- 45-year sesonal average

In short, this looks like a decent buying opportunity to me. It’s not one to bet the house on but if you’re looking for a chance to top up your gold holdings ahead of (hopefully) the next leg up, then I think the market is giving us a good chance to do so right now.

  • FRED

    You forgot some issues :
    – the pound is still diving,
    – the ratio debt/PIB is rising everywhere,
    – Central banks can’t stop QE’s, raise interest rate, and helicopter money are ready,
    – geopolitic risks etc

    • Tawse

      Good points but what relevance do they have to buying gold now?

      Are you saying that your comments means it is MORE likely for gold to rise or MORE likely that gold will continue to fall?

      • FRED

        I am long since the beginning of the year. You have one opportunity to take off again after the recent dip

  • Daniel Christian Schweizer

    Some facts forgotten: Indias physical demand collapsed 60% yoy. Price elasticity in phyiscal markets seems to be all but non existent. Above ground stock at all time highs. Record number of mined gold in 2016 (up 50% from 2010). Gold has nothing but tailwinds (central bank buying, geopolitical crises etc.). What, god forbid, there was a single headwind coming? It never made back its top from the 80ies. I do hold some gold. Just as “one” should or so. But I cannot see any reason it should appreciate in price. Not even winter.

    • FRED

      The bottom line is gold stocks are a screaming buy today. Their powerful young bull already suffered a massive correction before being wracked by an exceedingly-anomalous stop-running-fueled plummet. That reignited and ballooned the healthy mid-bull selloff, naturally leading to extreme bearishness on this sector. But the gold miners’ technicals and underlying fundamentals still remain exceedingly bullish.

      As gold’s own bull starts powering higher again as investment demand resumes when these lofty Fed-levitated stock markets inevitably roll over, the gold stocks are going to soar again. But as usual the only traders who will reap the coming massive gains are the prudent contrarians who can fight their own fear to buy low in this massive correction. Psychological discomfort is a small price to pay for multiplying your wealth.

  • haggardt

    I am keeping my powder dry. My income / savings are in sterling which is undervalued. If nasty stock / bond market / property crash, weak hands will sell and give buying opportunity – see Oct 2008. Sterling may have recovered by then.

    1025 GBP / 1250 USD / exch 1.22

  • anyoldirony

    Be sure to let us know in four months time how this went, Mr. Frisby.

  • Sarah Purdy

    What do you think about the Sprott miners and gold funds? You ahve never mentioned them?