Throughout the centuries, gold has been an important medium of exchange, store of value and in many cases, an attractive accessory. Yet, when it comes to investing, gold is a commodity like any other; it is volatile, subject to the rules of supply and demand, and it can return huge gains if bought at the right time.
There are many different types of buyers in the gold market, just as there are in stocks and other commodities.
As I said before, gold is a relatively volatile commodity, which is no bad thing since volatility is what creates price movement and allows us to profit from our investments.
Speculators, however, do not buy gold with the intention of holding it as an investment for long periods. More likely, speculators, such as hedge fund traders or day traders, seek to buy gold for just a short amount of time, riding the recent trend until they get a signal to close their positions. They will also happily short gold if their methods suggest money can be made by selling the metal.
But there are others who get caught up in the speculation too, the innocent public. All too often, the average person on the street will hear about the gold price ramping up, maybe reading in the paper about how traders are making huge sums of money in the gold market and they will get involved in buying gold too.
The problem is, by the time the average person on the street ask themselves whether they should buy gold now it is nearly always too late. News reports generally come too late for the general public and inexperienced investors nearly always lose their shirts when trying to time the markets.
Unlike speculators, hedgers have legitimate reasons for buying and selling gold since their business is often dependent on the price of the metal. Hedgers such as gold miners, gold service companies and financial institutions need to balance their exposure so will buy and sell gold futures to do so.
Interestingly, hedgers often catch market bottoms and top much better than speculators and data from the Commodity Futures Trading Commission (CFTC)can be used to analyze this relationship.
For the average investor, the preferred way to buy gold is as along-term holding. My analysis suggests that gold provides not only a viable alternative to other asset classes, but it is a commodity that can give decent returns, more than stocks in the right environments.
The ability to time the market is likely to improve returns and investors should refrain from following the crowd, particularly when speculators are bidding the price up.
In this way, the best time to buy gold occurs when any of the following conditions line-up:
- When inflation is expected to rise sharply
- When the gold price is at historical inflation-adjusted lows
- When financial or national crisis may be imminent
When the price of gold is below its cost of production (supply and demand)