Seeing gold as a long term investment

For the last two months gold prices are behaving in a very unusual way, a manner the gold market community is not accustomed to. After the climax of the initial mini rally and its culmination with a strong correction, the market has been looking for direction following extreme patterns we have rarely encountered during the last 10 years.

Ordinarily, the gold market moves in accordance with supply and demand, which in turn is influenced by world events, and market psychology. Difficult as these factors may be to define or interpret, they nevertheless give analysts an explanation of the market’s current movement, and at least a clue on where it might be headed.

Thanks to the Internet, good but also bad news travels fast; but regardless of the events and changes taking place in economies all around the world, the market was moving with decreasing technical volatility since April 15, until finally prices came to a 10 day halt at $1,300 an ounce before EU Parliament elections.

Price congestion

This unprecedented price congestion really hurt the market, and the negative outburst that followed was actually good news both because the market was finally in motion, and because strong buying opportunities started to appear for long term investors near the four month low, at $1,243.19 per troy ounce.

However, the prolonged drop was also bad news in the sense that the market overreacted to a situation that had been common knowledge for a very long time; bad psychology brought prices to very low levels, and short term prognosis was not good, until European Central Bank President Mario Draghi saved the day last Thursday by announcing interest rate cut-offs, and attempting to employ “unconventional” policies to kick-start the economy.

Prices settled above $1,250 per ounce with technical bounces in mid-sessions to test the market’s momentum, and still another 1 % gains this Tuesday and Wednesday after the announcement of the yuan’s strengthening against the dollar. Nevertheless, gold prices have not yet found a direction.

Gold looking for a trend

Under the circumstances, finding an explicit trend is easier said than done, as investors are focused on short term volatility rather that looking at the big picture, and traders and large players are exploiting that to their advantage anyway they can.

Looking at the big picture and your investment in the long term is your best option until the trend forms. You may feel bad because you didn’t sell your gold at $1,380 an ounce, but think what you would be risking for a 5% profit, provided that you were smart enough to buy at $ 1,270 an oz. paying a 2-3% premium.

If again you feel guilty for not buying below $1,250 an ounce, think that in the long term a 3 per cent margin in your buying price is nothing in terms of a long-term gold investment, particularly when you consider the high prices gold will reach when the stock market collapses. Besides, offer you deals that more than make up the difference.