When is the Right Time to Buy and Sell Gold?

August 15, 2012

When is the Right Time to Buy and Sell Gold?

The factors that affect the price of gold interact together through an economic cycle to produce peaks and troughs in the gold price that give traders the opportunity to buy and sell at pivot points in the price of gold. By recognising the signs that accumulate to create these points, a gold investor will be better placed to ignore the day to day fluctuations and be proactive in the bigger picture of an overriding gold trend.

The price of gold, perhaps more than any other asset, is dictated by both political and economic confidence, and usually runs counter to other assets. Equities, bonds, and property tend to perform well when the economy is good, and the political landscape is stable. Gold rises most when the economy is faltering, business confidence is low, and the political map uncertain.

Understanding when to buy gold will lead to understanding the best time to sell gold.

Interest Rates

When interest rates are low, cash in the bank yields less interest. Gold does not provide an income by way of interest or dividends, but low interest rates make holding gold for capital appreciation a more attractive proposition.

Inflation

High inflation causes the value of money to deteriorate rapidly. Gold is seen as a good store of value, more than holding its own as inflation rises. If inflation rises above interest rates, then real interest rates are said to be negative, and this scenario is very bullish for the gold price.

Monetary Policy

To combat a weak economy, governments and Central Banks will often relax monetary policy, cutting interest rates and printing money to increase the amount of money in an economy. This creates demand, which in turn increases inflation. Easy money – or an expansionary monetary policy – usually creates demand for gold because of the inflationary outlook of such policy.

Central Banks turn from sellers to buyers of gold

Central Banks have large reserves of gold. They may sell some of these to raise money to pump into the economy. This selling pressure will depress the gold price. When such selling ceases could signal a turnaround in a downward trend in the gold price, particularly when then followed by buying of the yellow metal by other central banks. Central banks tend to buy and sell in size, and this creates large swings in supply and demand.

Dollar Weakness

When the dollar is weak, investors turn to gold. Usually dollar weakness is initiated by economic weakness in the American economy. When investors fear this, they turn to gold as a store of value. There is a finite amount of gold available in the world. The United States government can print dollars. It is easy to see why investors believe that gold will always have a value.

Government debt

At some point, debt will have to be paid. To do this, governments will have to create money (print it) or devalue their currencies. Both are positive for gold. Government debt, and the expectation of policies to pay back that debt, will drive gold upwards.

Big markets become big buyers

When large markets, such as China and India, begin to increase their gold purchase, for industrial and investment purposes, then the gold price will rise. The potential demand from such markets cannot be underestimated, and could give a very large upward push on the price of gold.

Political uncertainty

One of the largest contributors to an upwardly mobile gold price is political fear. Unrest in governments, the threat of war, and unexpected election results can create such uncertainty. In such times, gold is seen as a safe haven environment.

So the best time to buy is…

…when inflation is high and interest rates at zero, creating massively negative real interest rates. Add to this printing of money by governments who are highly indebted, perhaps even issuing increasing numbers of bonds in an economy that is on its knees. To raise money to pay off debts and increase economic activity, Central Banks will have been selling their gold reserves, probably to China and India who have been investing in gold in a world that looks likely to explode into widespread war.

And the best time to sell…

…is the polar opposite of the best time to buy.

In reality, and certainly hopefully, we will never see the golden time to buy gold. But when a combination of factors gets as close as it can to such a nadir of economic and political fortune, then investment in gold is likely to produce sparkling returns as other assets fail to shine.