Should you buy gold or do what the market is telling you?


May 6  

Each and every time gold makes the slightest move upward, the inflationists come screaming out of the shadows calling for a meteoric rise in the thousands of dollars for the precious metal.

This has been going on for several years, and to their credit a few years ago it looked like they were correct.  Right up until the time when we began to hear and see gold related commercials on TV and the radio all day long, or see a gold ATM (Automatic Teller Machine) pop up in shopping malls and other public venues.

At the all time high in 2011, just as the sentiment got to an extreme and everyone wanted to know how high gold would go and how much gold they should have in their portfolios, the yellow metal began it’s long painful retreat downward back toward reality, just in time to fool most investors.

Where are we now and where do we go from here?

Gold has been chopping back and forth since make an intermediate low in June 2013.  We like to track the exchange traded fund GLD simply because when we take a trade, this is the preferred vehicle of most traders and investors due to it’s liquidity and implied simplicity.  GLD has not really gone anywhere when taking a long view on a performance chart.  However, the short term thinkers, pundits on TV and gold bugs alike will take any opportunity to do another “I told you so” when the price of gold moves higher by a few percentage points.

Take a look at the short term daily chart below to see what they see.  They see a recent uptrend to point to, and by human psychology standards people immediately extrapolate that GLD is going higher.

Gold Daily Chart

Now look at a longer term chart to see what I see.  I see a down trend that began at the peak in 2011 and proceeded down to the point it found some good support.  The issue remains that GLD is consolidating sideways from that support level which in many cases will produce another downward move in a major way, possibly finding a new level of support at around $100 per share.  Of course, this is a longer term view and may take another year or so to complete.  Certainly, we could see higher prices first, but the trend remains down on a longer term basis.

Gold Monthly Chart
The material difference is an investors time horizon.  A trader may see an opportunity to buy low and sell high over a day, week or month.  At the same time, the inflationist or long term investor who is holding gold for ultimate run to the upside of $5000 per ounce has to remain steadfast on their thesis no matter what the price action is telling them.

Traders see an opportunity to buy or sell based on current market conditions, where investors tend to create or believe a narrative based on a position they already own.

The mistake most amateur investors make is justifying their position with information they chose to believe rather than making decision based on current market conditions.

Don’t be the investor who looks for news and articles that support the current positions in their portfolio.  An example that you can most likely relate to looks like this.  You own GLD in your portfolio because “they” say you should own gold in your portfolio for diversification and protection against inflation, war, fear and any other scary scenario.

You perceive yourself as an informed investor because you take the time to keep up with current news and events pertaining to your holdings.  You go to or to see what new information is available as it relates to your stocks, et al.

What most people don’t realize they subconsciously do is read the articles and reports that directly support their desires and ignore the ones that contradict where their portfolio is positioned.

Next time you do your homework on your retirement account, don’t forget to look objectively at both sides of the trade.  Just because you’re long or short a particular security, it doesn’t mean you couldn’t or shouldn’t change your mind when the facts change.  Don’t make up your own facts, do what the market is telling you – it’s never wrong.

About the Author

Trading and investing in markets is second nature to some, but a mystery to others. The goal is to provide a forum where everyday people aspiring to be part time or full time traders will learn how view markets differently and profit beyond their wildest dreams.

David Frost