When, If Ever, Should You Buy Gold?

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This article is a guest post by Shaun Connell.

One of the things that can consistently make investing a difficult practice is timing. If it was easy to time everything perfectly, then everyone would be doing it and we would all be rich. Unfortunately, there are no exact answers on when you should invest in gold. There are some things to keep in mind, though, that will help you determine the right time for you to get involved.

In the end, the question of investing in gold right now comes down to your opinions regarding economics, and the future of the dollar. Do you think that it’s going to be strong in the coming months? Do you think that the down slide is bound to continue? These are questions certainly worth taking into account.

What’s the fate of the US economy?

This is a big question to chew on and it’s one that you won’t have a definitive answer for — like all investments, this is where the risk comes into play. It depends upon how you understand the economy and where you see things going next. Some people who are considered experts within the economics field will tell you that the US economy is heading for some trouble in the coming months.

Everyone knows that things have been rough for the last little while, but many people feel as if the worst might be in front of the American economy. Your thoughts on investing in gold are closely tied to your thoughts on the direction of the economy, so make sure that you understand it as well as possible.

Buying now if you feel the dollar’s headed for a slide

With some strong Asian markets starting to emerge and many other global currencies taking control in today’s world, the American dollar is looking weaker than ever. Many investors feel as if the dollar is just doomed to failure. There are signs pointing to large scale inflation in the coming years, even outpacing the current rates of inflation that we are experiencing.

For investors who feel like this is a likely scenario, the best advice is to buy gold as quickly as you can. Getting in when the price is low is a key, because that will increase your profit margins when it comes time to sell that gold way down the road.

Investing ahead of the curve

The markets work in a highly speculative way. If some big piece of news hits the wire and indicates that the economy is going down the tubes, then people are going to pick up on that and start buying gold. This will ultimately push the price higher and it will make it a tougher go for all folks who want to own gold. The best time to invest in gold is ahead of this curve. You have to be savvy to be a successful investor and this is what being savvy is all about.

If you feel strongly that the US dollar will not stand the test of time and that inflation is going to be a big factor, then you must go ahead and make the investments before that comes to fruition.

Holding off in case of a resurgence

There are investors out on the market today who do not share this view that the American economy is going down the drain. These people might feel like the reports are overblown and that people predicting doom do not understand the strength of the American machine. Though this view might be slightly misguided in light of what we know right now about the economy, it is one that’s worth taking into account.

If this happens to be where you stand on the future of the American dollar, then you wouldn’t want to invest in gold products. Common sense tells us that a renewed American strength would push the price of gold lower, so buying right now would be a poor idea in that case.

Some individuals might want to hold off on buying gold for just a little while if they think that the US dollar is in for a small jump that won’t last long. If you think that we are going to see a short, temporary rebuilding of the American economy before falling down again, then you could wait a few years to buy gold, hoping to spot a nice price entry point and take your profits from there. The key, of course, is timing and following your own economic principles in this regard.

Summarizing the situation

Nothing is incredibly cut and dry when it comes to gold investing. Different investors have different viewpoints on where we are headed, so it makes sense that these investors would bump heads on their gold strategy. Those who are looking at the data and seeing a tough time ahead for the dollar know that right now is the best time to load up on more gold assets. They are empowering themselves for the future and planning for the long term.

Those people who think the American economy is bound to recover would not share this approach, and they would want to sell their gold assets right now, as the price will never be higher if the dollar recovers.

Kyle C.’s Thoughts: I guess I am one of “those people”, if I had gold assets I would have sold them, not all of them, but a good chunk. Last time I checked buying¬†something¬†when it is at its most expensive is a bad idea.

Photo: motoyen

{ 7 comments… read them below or add one }

1 Matt SF February 17, 2010 at 11:35 am

“Last time I checked buying something when it is at its most expensive is a bad idea.”

Agreed, or when the slope of the stock chart has a rate of appreciation larger than 45 degrees.

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2 MoneyEnergy February 17, 2010 at 11:40 am

Agree with Matt SF on the parabolic slope – that’s a bad sign. That said, gold has corrected recently, blunting its parabolic pattern. Nice article!

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3 Daddy Paul February 19, 2010 at 7:27 pm

My two cents if you are going to invest in gold buy gold mutual funds. Most of these funds invest in mining stocks. Often these firms store gold and sell when the price is high making the fund price very volatile. Many times these firms are diversified into more than just gold making them better investments for the average joe.

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4 The Rat February 21, 2010 at 3:38 pm

Personally, I find gold overvalued and I’m waiting for it to come down a sizable level before I make a move.

To date, I have absolutely no gold exposure in my portfolio (physical gold, certificates, stocks, etc.); however, given the financial collapse over the past year or so and devaluation of the U.S. currency, my goal is to eventually buy a few 1oz gold bars (physical gold) in the advent of a global crisis.

Nice post!

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5 Steven and Debra February 22, 2010 at 11:53 am

Confidence in the dollar and our economy is certainly a consideration when buying gold. The dollar has been the reserve currency of the world for quite some time. The question is, will it be a permanent condition? What might replace the dollar? And, upon what foundational basis will the new currency be any better than the old one?

Right now, Euroland is coming apart at the seems. All the media focus is on the PIIGS (Portugal, Italy, Ireland, Greece, and Spain). In comparison, it would appear the U.S. economy is doing much better than Euroland because of all the media attention. Is this comparison justified or just feel good media noise?

Britain is also on the financial ropes and after the currency raiders get through with Euroland who is to say the pound won’t be targeted next? Would the dollar be next after the pound? The currency markets are the most sophisticated and largest of all markets and also the most ruthless. When the currency market smells blood, as in Euroland, no one is shown any mercy. We wouldn’t be surprised, however, to see the Federal Reserve coming to the PIIGS rescue in attempt to confuse the currency sharks circling the Euro. How much more can the Federal Reserve and the U.S. Treasury paper over these problems without destroying the dollar in the process?

Ultimately, it is a choice between paper promises and that which is tangible. If one believes that society’s values, overall, are in a state of improvement, paper promises might be the preferred “safe harbor.” If, on the other hand, one believes that society’s values are in still in a bear market of sorts, gold would offer a much more “safe harbor.”

It is really a fundamental consideration of where one believes we are in the cycle of trust. Trust is cyclical and trust is often thrown under the bus when society’s core values tank. Do you trust the Big Five banks, Goldman Sachs, AIG, the Federal Reserve, the U.S. Treasury, and our politicians to be open and transparent? If you do, buy the paper. If you don’t, buy gold.

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6 David Shafer March 4, 2010 at 4:24 pm

Purchasing gold is speculation. It doesn’t provide cash flow, income, or dividends. You might want to start enlarging your thinking beyond growth to a value approach like Warren Buffett. As to speculating on gold, your guess is as good as anyone’s.

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7 Jim March 8, 2010 at 2:42 pm

Gold is as valuable (or not) as people agree it to be, just like paper money. Gold is seen as valuable because it has been seen that way for a long time, not because there is any intrinsic value in it (other than the minor manufacturing and jewelry uses.)

If you think gold will continue to be agreed upon by the world as valuable, buy gold, but don’t think, as so many gold sellers tell you, that it’s a “hard” asset, insinuating that it has intrinsic worth. Humans give value to things, whether it be paper money or gold or whatever, because they need to in order to trade, etc. Gold is only one among these. If you think the world will be going to hell in a handbasket, you might do as well to stockpile food, water, and such as buy gold. Bet that if the badness lasts long enough, your gold won’t help you fend off the hungry crowds that don’t own gold!

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