Gold, as we write is still sitting at around $1,660. We suspect that investors are waiting to see what Ben Bernanke has to say at Jackson Hole later today before they make their move.
If Bernanke makes some definite comments regarding monetary easing, then we will see the gold price move dramatically. The direction of the movement depends upon whether he hints at more or less easing in the immediate future.
We at barbarous relic do not know what he is going to say. To be honest, we don’t particularly care what he says. We are confident in our long-term assessment of the current financial situation and believe that, at some point in the not too distant future, gold is going to be worth a great deal more than it is currently. We therefore don’t know what will happen to the price of gold after Bernanke speaks, but we will react to any price movement, in line with the principles we espouse in this blog.
Gold is holding around the $1,660 level today. It appears that there is some profit taking occurring at the moment, which is putting downward pressure on price. The fact that price is holding up pretty well is confirmation that the market is currently strong and this is a good augur for higher prices to come.
Higher prices are probable, but by no means certain. Also this is what we currently believe, we do not know. So we continue to watch and wait.
Gold has fallen slightly today, to $1,665.
Days like these can be dangerous as it can be tempting to trade just for the sake of it. We are sitting on plenty of cash so why not buy a bit more gold – we KNOW that it is going to worth much more next year?
Well, yes it is true that with everything we know about the current state of the world economy and the level of indebtedness of western governments, we firmly BELIEVE that gold is going to increase substantially in price (priced in fiat currency). What we do not KNOW, however, is how gold is going to eventually arrive at that end price.
One of the greatest determinants of investing success is the correct allocation of capital at various price levels. We cannot control events, and if some event occurs in the future that sends gold down to $1,000 then we want as much capital available to allocate at that level.
People who fear a sharp decrease in gold at the present time are, by definition, over invested at this price level. We at barbarous relic are comfortable with whatever gold price we are given. If events were to suddenly rocket gold to $6,000 an ounce then our core holdings would make us very wealthy and our non-core holdings would be sold into that strength, swelling our cash balance. If the aforementioned low was revisited then we would gleefully “back up the truck” and snap up the ultimate asset at a fire sale price. We would not, however, spend all our cash at this price; we would “allocate” capital. Deep weakness would call for heavy buying but we would have to allow for gold at $800 or $500 or even $250. We wouldn’t KNOW that gold would go there, but we would need to be ready if it did.
Today, gold is holding at around the $1,670 level. We are therefore waiting to see if we are going to get to our next sell level of $1,690 any time soon. Of course, we may see some heavy profit taking and gold could fall back down to under $1,640. What would we do then? Yes, we’d buy the weakness of course.
Don’t forget, we sold into $1,640 only three days ago so we are not going to re-purchase at that level – not after such a short amount of time. If gold traded at around $1,670-$1,700 for a protracted period we would “re-set” our baseline and would then see a drop to $1,640 as being $50 of weakness. A move back down in a couple of days does not count in our books and we would be looking for greater weakness in order to continue buying.
This may seem like the barbarous relic being over picky, but we have found that this method has great merit and we stick to it through thick and thin. It works for us.
The minutes of the last FOMC meeting were released yesterday. The minutes showed that the doves may well be winning the battle within the Fed with regard to further quantitative easing. The result is that gold has moved some $30 to the upside.
Does that make us regret our decision yesterday to sell some gold at $1,640? Absolutely not! We sell into strength and book profits. We sell lightly into small strength and heavily into large strength. Yesterday saw some light selling and we shall sell some more if and when gold hits $1,690.
We sold some gold yesterday into the strength at $1,640 (making a minimum $60 profit on each ounce bought at a maximum price of $1,580). We are now in a very strong emotional position. If gold continues to increase from here we will be happy that our core holdings are continuing to increase in value. We will also continue to lightly sell non-core holdings.
If the gold price turns round and falls back to under $1,600 then we will be happy to buy more gold into the weakness.
The secret here is that we are admitting, loud and proud, that we DO NOT KNOW where the gold price is going in the short-term. If we believed that we KNEW, then we would allocate more money than we should at a particular price point and we would probably lose money.
If we KNEW that gold was going to crash back down then we would probably have sold deeply into the strength of $1,640 (we might even have sold some of our core holdings, content that we would buy it back again later at a much lower price). If the price then surged ahead we would likely panic and rue letting go of so much gold at such a low price. We would be tempted to buy more, at the higher price, to prevent getting left behind.
If we KNEW that gold was going to surge ahead then we would probably not have sold one ounce into the “mini” strength. Why would we, when we could sell it later at a much higher price? If the price then, rather than going to the moon, fell back down to under $1,600 how would we react? We would kick ourselves for not taking a profit when we had the chance. We might now panic and KNOW that gold was going to fall further and sell what we should have sold at $1,640 at a much lower price. Or, we might now KNOW that gold was going to bounce straight back to $1,640 and buy more so we could sell even more at the higher price when it arrived. We would be over-allocating funds at a single price point.
We therefore struggle and fight to remind ourselves to believe that we do not know where price is going, in the short-term. We do not place money on the price curve in anticipation of its future direction, but react calmly to where it IS on the price curve.
Gold is slightly up today and is currently sitting at $1,627. When price hits $1,630 we shall sell some of the gold that we purchased at $1,580. These holdings are non-core, trading positions – not core positions that we are holding with an iron grip and have no intention of parting with, whatever happens.
This is one of the fundamental tenets of our investing philosophy. Our core holdings are not just nominally separate, they are kept physically separate in different trading accounts. We generally do not spend much time thinking about or looking at the core positions. They were generally purchased a long time ago and will not be sold until we believe that the current gold bull market has run its course. Their purpose is to enable us to directly benefit from the entire price appreciation (whatever that may end up being) without the remotest chance of missing out by being out of the market at the wrong time.
The purpose of the non-core holdings is to enable us to benefit from the volatility of asset prices. It enables us to buy weakness and sell strength without the constant worry that we have not bought at the exact bottom of the trading range or sold at the exact top. It enables us to trade almost without emotion which, we believe, is the only way to consistently make money in the market.
Well, we’re back after a week away in Cornwall UK. We have kept in touch with the gold price whilst we were away and see that we haven’t been missing much!
We suppose that the current lack of volatility makes sense. The price chasers that bought in to gold in the $1,900s probably sold out in the $1,700 – $1,800 area and are currently sitting out on the sidelines waiting to see what happens. Those of us that bought at much lower levels (and operate a buy weakness, sell strength mechanism) have already invested what we want to at this price level and will not be trading until price changes significantly.
We still feel that our favourite gold stocks are significantly on sale and so are continuing to accumulate at these levels.
Gold is currently at just under $1,612, and we at barbarous relic are watching and waiting.
We are currently taking a bit of a summer break so posting will be erratic for the next week.
Gold is at $1,617 this evening. We are beginning to wonder if we should tighten our buy/sell increments somewhat as gold seems to be stuck in a very tight range. We are currently working with a $50 increment (i.e. what we buy at $1,580 we sell at $1,630) but this isn’t working at the moment.
We remember, however, that this is a marathon and not a sprint and as this gold bull progresses we feel that we will be increasing this increment to the hundreds of dollars rather than decreasing it. We watch and wait.