28 August 2012 14:00

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.

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