This past week has been a good reminder of how volatile precious metals can be. For that very reason, I choose not to buy and sell based on the 200-day EMA like I do with equity investments. When the precious metals market rebounds, it can shoot up just as quickly as it came down, making it hard to follow a trend.
I consider gold to be portfolio insurance, not an investment; I’m not interested in trading in and out of gold to capture short-term gains. The main reason I invest a portion of my clients’ portfolios in precious metals is to act as a hedge against inflation. Every time you hear the words quantitative easing (QE), currency war, or devaluation in the news, it’s only a matter of time until inflation kicks in.
Global uncertainty is also a pretty good reason for owning precious metals in a portfolio. For example, if you were to “Google” North Korea, Cyprus, Euro-Zone, China, or Japan, chances are you’d find plenty of articles that mention gold also.
And finally, here is a statement from Sprott Asset Management market strategist David Franklin that I think does a great job of explaining why they (and I) are still bullish on gold:
“The recent price action in gold can only be described as ‘panic selling’. Money managers and veteran traders know that when panic sets in and markets start moving rapidly, ‘investing’ logic drops by the wayside and money begins to flow one direction only. We have seen this over the last two trading days in long gold positions in the futures and ETF markets. This selling in turn drives prices lower, forcing those holders on margin to liquidate their positions. This process leads to even more selling as the pain of holding levered ‘under water’ positions becomes too great, causing traders to liquidate their positions. The light at the end of the tunnel for precious metals investors is that these events have been value-buying opportunities that occur only a few times a decade.
The gold market has seen this before. Think back to 2008. At that time we were told that there was no reason to own gold anymore, it was no longer a safe haven and that its bull run was over. Sound familiar? The main reason gold plummeted during that panic was because safe-haven buying flooded into U.S. dollars instead of gold, driving the biggest rally the greenback has ever witnessed. Gold subsequently bounced back from this selloff and went on to new highs. What did we learn in 2008? We learned that it was a mistake to sell gold when it was out of favour and at a low. In our opinion, the accelerated decline we have seen in the first quarter of 2013, suggests we are in a similar capitulation phase, as investors temporarily abandon their gold exposure.
For all the short term pain it has caused, we view this selloff as an opportunity. All the pre-conditions that brought gold to this point are still intact. The bond market is still showing negative interest rates, Japan and the United States plan to flood the world with a liquidity injection of almost $2-trillion dollars over the next 12 months, and not one G20 country has a balanced budget. While market commentators are predicting gold’s demise as an asset class, astute investors will recognize that we have seen these conditions before over the last 12 years. Each time the ‘paper market’ for gold has capitulated it has represented a buying opportunity for gold rarely seen again. Despite this panic selling on Comex and other ‘paper’ markets, investors in the physical market for gold, have been taking advantage of this price action.”
Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions? Call me to schedule a free review of your current investment portfolio – 913.402.6099.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.