Gold Prices Dropping

You may have noticed that the price of gold and silver has taken a fall in recent months, with gold plummeting significantly just in the last few days.   One big factor in this loss of value is that ETFs and other market investors in gold and gold futures are selling off and –

Hm?   Oh, you thought gold was immune from the ebb and flow of “imaginary money” of the stock markets and federal reserve?   You might want to look back and remember that in 2003, when gold Exchange Traded Funds started being traded, the price of gold has gone up five-fold.  For the most part, investing in gold is a commodity market, with a limited supply and varying demand.   Not much different than grain futures and the like; when the dollar gets weaker or demand goes up, the price increases.   That’s nothing inherent in the object; that’s the benefit of investment.    When gold ETFs came on the market, suddenly demand went up; coincidentally, over those same years the value of the dollar dropped, causing the price of gold to inch higher.

Gold’s perceived immunity from market fluctuations is that, because it isn’t consumed or renewed, there’s a level of stability to it.  Up until 2003, if you bought gold in the seventies and sold it at a 2003 price, your return would have been pretty close to inflation.   The past ten years have resulted in growth beyond inflation, so that’s where everyone got so interested, driving up demand and prices.

So, what goes up comes down:   if the selloff of ETFs is any indicator, demand for gold is dropping, and so do prices.  The world economy seems to be recovering, which will reduce inflation.  I highly doubt that the price of gold will suddenly return to 2003 prices (or lower), but there’s likely to be a correction back down below $1,000 sometime soon.

So, should you sell now?  Well, if you bought recently, no; you’ll take an unnecessary loss.  Wait another ten years, you’ll do OK (although not as inflationarily well).   If you bought five years ago:  maybe (and I’m not your financial advisor, so do your own research) and take your 100% profit out, invest it somewhere safe, and in a couple years buy when things look at about the bottom of the curve.   If you bought gold more than ten years ago:  you’ve waited this long, you must have a reason; this is a blip in the long-term increase in the price of  gold, a boon for those who were watching closely, but every investment sees sudden, huge gains and quick loss of value, and that’s exactly what long-term investing is supposed to ignore.

But, now, when should you buy?  If you want to use recent evidence as an indicator for the future, wait until the price has dropped significantly, then start watching ETFs and futures and look for expectations of a rise in demand.  Look at the U.S., China, and European economies, watching for excessive borrowing and printing of that “imaginary money” gold investors so fear.   The increase in demand combined with economic slumping and coated in a creamy shell of inflation is the ripe time for gold prices to rise; when you can check those off your list, that’s a time to buy.

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