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When to Buy Bullion

Over the last 10 years gold has been less volatile than global equities, commodities and other investment indices, including real estate. There has been no great concern over the issue of market timing, therefore - when to buy gold (or platinum or palladium, for that matter). That said, prices will fluctuate from day to day and you should watch the movements published on the websites of bullion brokers to see if you can take advantage of a small dip in price, but it has not been usual to see huge daily movements that should sway your decision.

Over the last 10 years gold has been less volatile than equities or other commodity inidices

Silver is more volatile, however, and is perhaps best seen as a counterpart to gold. The two metals do not necessarily correlate in their movements and silver could be considered as a diversification play. In times of crisis, silver has historically risen faster than gold, and therefore could be used as a hedge within your portfolio. It is important consider this when deciding on when to buy silver.

A ‘Safe Haven’

Conventionally, gold has always been a ‘safe haven’ investment when economic times were hard. It was written off by some analysts during the long rise of conventional investments, because when equity markets are bullish and interest rates are high, investor sentiment tends to be optimistic and gold tends to decline in price accordingly. At present, when most forecasters predict several years of austerity, and major currencies are devaluing rapidly as governments print more and more money, the overall outlook for bullion markets looks positive. If it were not so, why would the biggest investors of all - central banks - be net buyers of gold?

China and India (both the governments and their people) have been increasing their gold purchases in recent times, as they seek a safe place to invest and a way of reducing their dependence on the dollar and the euro. Even within Europe, investors in France, Germany, Switzerland and Turkey are reportedly buyers of gold. Consider the motivation of the French: with the Government squeezing the rich and closing offshore loopholes and with a gloomy economic and investment outlook, the reaction of wealthy investors has been to take their money out of circulation. Resultant gold purchases have soared in the last 12 months by 1600%.

That said, all investments will go down as well as up and you need to base your investing decisions and timings on technical analysis.  This involves the consideration of, inter alia:

  • Chart patterns
  • Moving averages (which smooth out the day to day picture)
  • Market trends
  • The economic cycle

In your research of when to buy gold or when to buy silver, it also pays to go beyond the pure figures and look at some reports for analysis on the market and the macroeconomic situation. This report from the World Gold Council, ‘The Strategic Case for Gold’, from October 2012 is particularly enlightening.

Increasing Scarcity

Be aware that the discovery of new gold reserves is shrinking year by year, and production is, at best, static (reported output peaked in 2003). 37% of gold is recycled rather than new. Platinum is in demand from industry and is very scarce (80% derives from South Africa) while palladium, also used in cars, dental and chemical products, is 15 times rarer than gold. In a world where demand is rising, the market should continue to favour precious metals.

When he was Chancellor of the Exchequer, in 1999 Gordon Brown notoriously sold off 58% of the UK’s gold reserves at a low price and even flagged up the sale in advance: this act led to concerted action by European national central banks and the European Central Bank. They agreed that gold should remain an important element of global monetary reserves” and took the highly unusual step of creating the Washington Agreement on Gold (WAG). As a ‘gentlemen’s agreement’ this cuts across the independence of banks but they were unsettled by the possible destabilisation of the market. The World Gold Council commented that it “has been aware that some of the biggest holders have for some time been concerned about the impact on the gold price—and thus on the value of their gold reserves—of unfounded rumours, and about the use of official gold for speculative purposes.”

WAG to this day coordinates sales of official reserves into the market within Europe and limits the total overall to:

400 tonnes p.a. (1999-2004)
500 tonnes p.a. (2004-2009)
400 tonnes p.a. (2009-2014)

This does release gold into the market but in a controlled and limited way that has supplied a positive (and some would say cartel-creating) impetus to the market. Back in 1999 the price was low. The continuation of WAG does prevent hard-pressed treasuries from offloading too much gold and depressing the market back to historic levels. It has also slowed down the eastwards shift in gold holdings, although it cannot reverse it.

It is possible to concentrate too much on the short-term performance figures. No-one is suggesting a risky play such as placing most of your savings into bullion. Recent data points to an optimum figure of between 5 and 10% of your overall portfolio.

The longer-term picture

What is the longer-term picture likely to hold? China and India now represent 50% of the world’s holdings of gold and other emerging markets are increasing their purchases. China and India alone will contain 40% of the world’s middle-class purchasing power by 2030 and they have a cultural affinity for the precious metal. The Indian wedding season alone creates a seasonal uplift in worldwide jewellery consumption.

The trends are towards more and more gold being held for investment purposes. 49% of the world’s above-ground gold is in jewellery, and only 19% is in private investors’ hands:  but in 2011 the share of demand in terms of new acquisition was that jewellery took only 44%, while investors snapped up 36% of the available product. We have all seen the explosion in retail and internet outlets that are desperate to buy back your unwanted gold, much of which is purchased at unfairly low prices and then melted down and turned into investment-grade bars and coins.

So to sum up, the question is not so much ‘when is a good time to buy gold?’ but ‘when is it not a good time?’ Remember that all ‘fiat currencies’ (which are not linked to the value of gold) have lost value over time: and with governments printing more and more money in endless rounds of ‘quantitative easing’ to try to stave off a crash, precious metals offer a true store of value.

“If you don’t trust gold, do you trust the logic of taking a pine tree, worth $4,000-$5,000, cutting it up, turning it into pulp, putting some ink on it and then calling it one billion dollars?” – Kenneth J. Gerbino

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