When to Buy and Sell Gold?

Introduction

Market timing is one of the targets of most investors, though optimally achieved by few, if any. As with any investment, the general rule of thumb is to invest in gold for the long term. Of course, in the case of gold this adage is even more pertinent: gold is a finite, if non-quantifiable, resource and it follows that as the world’s supply of gold diminishes then its price will rise.

Buying Gold

Gold can be bought in several forms. Physical gold, gold mining shares, exchange traded funds (ETFs), and digital gold are all instruments of investment that a gold investor has access to.

Just as equity markets have shown a rising trend over the long term, so, too, has gold. From an investment perspective, however, an investor would either have had to be invested in exactly the right stock or an extremely wide and diversified equity portfolio to avoid the loss of investment capital through poor investment selection. For example, an investment of just £20,000 in Pollypeck in 1980 would have been worth millions on the 19^th September 1990. On the 20^th September 1990, the shares became worthless. Gold is a single investment that will never become worthless.

Gold is, in effect, real money, and would be accepted as currency worldwide. It is held as reserves by governments and central banks, and used in industrial processes and manufacture of jewellery. In times of economic turmoil or political unrest, investors turn to gold as a store of value or hedge against inflation.

In short, it could be argued with some conviction that there is never a bad time to buy gold. However, whilst this may be true, it is also valid to state that there may be better times to buy gold than others.

Periods of rising inflation, or low interest rates and other monetary easing measures, are likely to see the price of gold increasing. A weak US Dollar is also likely to see demand for gold increasing as investors seek to protect themselves from falling Dollar denominated investment valuations.

Within these rising trends, there will be peaks and troughs, and it is these natural rhythmic price movements that may be considered good selling and buying opportunities..

For short term investors, or those looking to take advantage of short term movements in the gold price, technical analysis can be used to indicate reversals within a trend. For those looking to invest for the longer term, examination of the factors that influence the gold price will lead to an informed decision on gold purchases.

When to Sell Gold

Even when the world’s financial markets are collapsing, gold will have value. Being a resource, and with a finite supply, it is more likely to rise in value over a long period of time than other investments. Conventional wisdom, therefore, is to never sell gold.

However a peak in the long term price of gold, and the potential for a sizeable correction, may be indicated by a concerted and widespread clamour for gold. This might include the shares of mining companies trading on extremely high price to earnings ratios in comparison with their historic values, and queues of people wanting to buy gold from gold and coin stores. Bull markets in any instrument tend to have a final upward surge as investors, not wanting to ‘miss out’, pile in.

Conclusion

As a finite reserve, a store of value and hedge against inflation, investment in gold has a solid fundamental basis. A good investment strategy is to buy little and often, whilst selling might be best considered when only essential to do so. Who can forget the then UK Chancellor, Gordon Brown, selling most of the country’s gold reserves between 1999 and 2002 at an average price of $275 per ounce?

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