Just Buy Gold

Russia invaded Ukraine . . . so you should buy gold.  There is a civil war in Syria . . . so you should buy gold.  The ECB has instituted their own form of QE . . . so you should buy gold.  Terrorists attacked France . . . so you should buy gold.  I even heard one analyst suggest to preemptively buy gold before a holiday weekend “in case” there is a terrorist attack . . .  for which you should buy gold.  And, now, the US stock market is supposedly in melt down mode . . . so you should buy gold.

The insanity just does not end.  As another day goes by, so does another failed reason to “just buy gold.”   These “analysts” should simply work out a deal with Nike to borrow their slogan “Just Do It” when suggesting to their readership to buy gold, and just leave the reasons out.  At the end of the day, they have been repeating the same mantra over and over all the way down from the 2011 highs without any understanding of how the market works.  So, are they really saying anything other than “just buy gold?”

As an investor, one must always understand the “why” and the “when” one should be a buyer of gold.  In fact, there are many reasons why people buy gold.  Some will buy gold as a trade.  Others will buy it as an investment.  And, there are a number of people that buy it as “insurance.”  So, before you buy gold, you must understand which buyer you are so that you first understand the “why” of your gold purchases.  Once you understand your own “why,” then you can begin to work on the “when.”

Insurance

Let's start with those that buy gold as insurance.  Now, I am not opining as to whether it is right or wrong to use gold as insurance at any point in time.  But, I am simply recognizing there is a large group out there that “feel” they need to own gold as insurance and I am addressing that investor perspective. 

So, think about it.  When you buy healthcare insurance or disability insurance or automobile insurance, do you try to time your purchases to when the price comes down?  No.  You simply buy it when you feel you need it or when your previous policy runs out.  This is how many view their gold purchases.  And, it is not an unreasonable perspective at all. 

But, the main mistake made by these purchasers is that there is a point where they have become over-insured, just like with any other insurance policy.  If we are all honest with ourselves, we realize that there is a limited amount of insurance one requires, and we do not continue to buy more and more insurance as each month goes buy.

When an “insurance” buyer of gold reaches that point, they have now unwittingly moved into the classification of an “investor,” but refuse to acknowledge this perspective.  Rather, they label themselves as “stackers,” while others label them as “gold-bugs.”  They purport to be buying gold as insurance, but it is quite clear that they are way over-insured.  If they were truly honest with themselves, they would recognize that they own too much to consider it as true “insurance,” and a portion – often a significant portion – of their holdings are really being held as investors, or even, dare I say, speculators. That is why so much emotion is spewed into this market by these buyers of gold, especially as gold has dropped in a manner in which they did not expect.  Let's be honest - do you really think insurance holders would be so publicly emotional and venomous?

Investor/Trader

Next, we look at the investor/trader group.  The only real difference between these two camps is the time horizon for which they buy, with the investor group clearly maintaining the larger time horizon within which they seek to profit.  But, for both, entries and exits in their positions are of utmost importance.  Their goal must be to buy at the lowest prices, and then sell at the highest prices within their respective time horizons.

Therefore, they need an objective tool to be able to identify when they have achieved relatively low prices in the market, as well as relatively high prices in the market.  They simply cannot “just do it.”  They cannot “just buy gold.”   They need a plan, or they will not maximize their profit potential. 

So, let's go back to the premise with which we began this article.  Many have suggested buying gold at various times over the last several years for a litany of reasons.  But, when it comes down to it, none of what has been presented in their “analysis” has helped any of the camps noted above.  Insurance buyers will be buying at any price, so it really makes no difference what the market “reason” is for gold to go higher.  And, it is quite clear that investors and traders who acted on these perspectives have done quite poorly.  So, I ask again, who has benefited from any of these perspectives which have been paraded before the market week after week, as each fresh news story hits the wire?

I urge all market participants – other than the true insurance buyers – to identify for yourselves an objective methodology with which you enter and exit the market rather than blindly follow what has clearly not worked for years.  And, please do not try to fool yourself into thinking you are always buying for insurance purposes, as I can assure you that you are likely “over-insured” based upon that perspective.  In fact, you have likely moved into the self-proclaimed “stacker” camp, which ultimately is just a bad investor seeking a seemingly better label. 

Just something to think about. 

Avi Gilburt, Esq.

www.elliottwavetrader.net