Uncertainty Driving Gold Markets

Wednesday, 23 October 2013
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Published in United States Economy
The Federal Reserve. The Federal Reserve. PhotoDune.
With the Federal Reserve in a state of transition, with new leadership coming to the helm and the clown show we call Congress taking the country to the brink of a catastrophic default, gold prices are on a tear this week. Gold is up $48 an ounce for the week so far, completely erasing losses for the month; and the uptrend looks to finish the week out on a high note. 

First-Strike

Congress limped across the finish line with a short-term extension to the debt ceiling, and enough money to keep the government open for business for another few weeks. After that brief interlude, we can look forward to the circus coming to town all over again.  At this point it really doesn’t matter if Congress passes a new budget or not — the damage has already been done.  Uncertainty is bad for business, and that fact is reflected by a sudden interest in defensive currency investments, like gold and silver, which had been on a fairly comfortable downtrend since the later part of 2011. 

Some people get confused when I suggest that correcting gold and silver prices is good news, because they think I’m telling them not to buy precious metals.  That’s not the case at all; in fact when times are good, gold and silver go on sale as investors shift money into riskier assets. If you’re going to buy any good or commodity, would you rather pay full price or pick it up at a discount?  When you find yourself asking that question, then you’re on the path to enlightened investing.  Perhaps it’s also instructive to review the sound financial reasons for keeping a percentage of your wealth in hard commodities like gold and silver in the first place.

Unless you’re a precious metals dealer (and I’m not), you’re not buying gold and silver as speculative investments.  Sure it’s great when you happen to make money on your precious metals investments and, if you’re holding it for long periods of time, you almost certainly will come out ahead.  But you keep a percentage of gold and silver in your personal portfolio for the same reason a ship carries ballast; as a counterweight to the ups and downs of financial markets and the vagaries of printed money that has no backing beyond the full faith and credit of the United States, which frankly doesn’t look that shiny right now. 

Taking a very long view, it’s during periods of economic prosperity that gold and silver prices trend down.  If you look at the heady days of the 80s and 90s, you’ll notice gold and silver prices remained relatively flat until we get to the early 2000s, which is when the bills for the lavish growth and loose currency policies of the 90s came due. 

The vaulting gold prices of the 2000s were not a good sign for our economy, and the 2000s were marked by a series of shocks that included the dotcom bust, the housing bubble, and the stock market implosion.  All of that bad news was fantastic for gold, and it was awesome for people who didn’t try to time the market and had patiently bought precious metals in small increments over the previous 10 or 20 years. 

When it comes to managing wealth, precious metals are the classic win-win investment; if the economy is banging then precious metals prices trend down, but you don’t care because the economy is doing great. It’s your chance to make small, regular investments in quality gold and silver and get them at a discount. When economic dark clouds arise and fear grips the markets, you can take some comfort that your precious metals investments are flying. If you need the cash, that’s the time to sell your gold. 

If it sounds a lot like I’m saying “buy low, sell high” then you’ve got it right.  Where I grew up that was the key to making to money. 

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.