Is Gold a Good Buy Right Now?

In my first post, I wrote about why I created this blog and what I hope to accomplish with it.

But now that such introductions are out of the way, I want to get on with the primary question that probably caused you to seek out this blog in the first place: Is right now a good time to buy gold?

Most blogs that talk about gold are written by “perma-bulls”. These people believe that it’s always good to buy gold. Their reasoning for this position is that buying gold is always justified because it is in a 16-year bull market that is unlikely to come to an end anytime soon. For fundamental reasons, they say, gold cannot go down in the long run because real interest rates are low, negative, and falling and because the U.S. government is so far in debt that it can’t possibly allow real interest rates to rise anytime soon.

While I agree with this fundamental view of the long-term value of gold, I must respectively disagree with the idea that it is always a good time to buy. While gold is in a long-term bull market, it does sometimes fall. And these falls can be opportunities to buy at a lower price, allowing the individual gold saver to get a greater amount of gold for the same number of dollars.

In addition, traders can sometimes use leverage to stockpile even greater amounts of gold if they borrow cash to buy it when it is temporarily low, then sell when it is high and use the profits to buy more gold.

So the answer to the question “Is it a good time to buy gold?” should not always be “yes”, even if you are fundamentally bullish about gold.

So is it a good time to buy gold right now?

First, I must state the usual disclaimer about not giving investment advice on a blog. Obviously, the information in this blog is for general purposes and does not constitute personal investment advice to you, as I do not know your personal situation. You should always consult your financial adviser before implementing any of the strategies discussed in this blog. But you knew that already, right?

So let’s look at a chart of the U.S. dollar priced in gold.

The dollar had a nice run at the end of last year, but has been steadily declining since.

Notice the blue line on the chart. This is the 100-day exponential moving average (EMA). The red line, on the other hand, is the 200-day exponential moving average. These lines tell us the general trend of the dollar’s value (in gold) over the past year, which is down. In addition, the fact that the blue line has crossed the red one is an especially bearish signal, as this usually only happens when the direction of a trend is changing.

Notice especially what happened in late May/early June. The dollar had been far below both of the moving averages, but it suddenly moved up into the area between the two averages. When this happens, it is usually a sign that the dollar is overvalued and will soon fall. If you bought gold during this time, you got it at a very good price.

Notice also what happened near the end of July. This is when the Brexit vote was occurring in the U.K. At the time, the dollar had hit a low and was returning back up to the moving averages. Had the U.K. not voted for Bexit, the dollar probably would have continued going up until it hit the EMAs and then bounced down again. But the surprise vote in favor of Brexit reversed this course and caused the dollar to fall precipitously.

Finally, notice what happened the week of October 2-8 (the week before this past one). Some news came out that Deutsche Bank, one of the largest banks in the world, was going to have to pay a fine to the U.S. government that it probably couldn’t afford. This caused panic among investors in European assets, and they started selling their Euros for U.S. dollars, causing the dollar to rise in Euro terms. The spillover effect from this also allowed the dollar to rise in gold terms.

Like the late May/Early June pullback, this recent dollar upswing represents an opportunity for savers in gold to get it at a cheap U.S. dollar price.

If you are thinking about buying gold now, but decide to wait a few months until the price is lower, you are likely to find that you get less gold, not more, for the same amount of dollars.

But what about the next two or three weeks? Let’s zoom in to find out more.

dollar-gold_pastweeks_10-15-16

On this chart, the blue line is the 10-day EMA and the red line is the 21-day EMA. The dollar is definitely in a short-term uptrend. However, it’s price in terms of gold has not yet fallen to touch or pierce the blue line. This means that the uptrend is still young and not fully established. It may reverse over the next week or two or it may continue up.

The bottom line is that if you decide to buy gold right now, you may miss out on lower prices in the next few weeks, but this is still the best price available in several months. So it’s still a pretty good time to buy gold.

However, buying gold using leverage (borrowing dollars to buy gold) is probably not a good idea right now. The dollar is in a short-term upswing, and this trend may continue for a few more weeks. In addition, it may take months for the dollar to fall back to a price at which you could reasonably close out your position (by selling your gold and paying back your broker, using the profits to buy more gold that you can keep).

It’s also possible that the trend itself could reverse, and the dollar could continue going up. The system I use for trading is a “trend trading” system. It works well as long as the current trend continues, but it can’t predict changes in the trend itself very well.

However, the idea behind a trend trading system is to make so much money during the trend that your gains are greater than the inevitable loss you sustain when it finally reverses.

That’s all for today. Early next week, I’ll have more general info on how to trade gold. And seven days from now, I’ll give another update on the current price action in USD/gold.

Until then, happy trading.