Monday, August 20, 2012
Good Time To Buy Gold
The fundamentals for gold have been getting better and better since 2008 and those that bought were certainly rewarded. For those who missed the opportunity, there is another chance to buy now at a reasonable level before the consolidation we've seen in gold ends and it begins to increase in price once again.
You can see below that gold is completing a similar trading pattern we saw in 2008 where it hit a short term high then sold off. I've mentioned before this sell off was partly because traders and banks were forced by margin calls to sell their best performing assets to meet capital requirements. Since gold was not then a Tier 1 rated asset they had to sell gold and buy Treasuries. I've also previously mentioned that that may change if the BIS makes gold a Tier 1 capital asset.
The recent sell off in the last year has been a healthy consolidation period, the type we would expect to see in any investment with a long term bullish trend. The timing for buying now may be excellent as measured below. In the graph below we see the trailing year over year returns expressed in standard deviation. As long as fundamentals are good (and they are), buying below the mean (measured as zero on the graph) while standard deviation is negative is an excellent time for the long term investor to buy.