Download now: The Downfall of Cable, and the Rise of 5G!

Buying Gold on the Cheap

Why I'm Betting on Gold

Written by Geoffrey Pike
Posted November 7, 2014

It has been a crazy roller coaster ride for financial markets lately.

Stocks have been up and down, but more up than down. Gold has also shown more volatility lately, but there has been more downside than upside.

In the last week of October, gold fell below the $1,200 per ounce mark, while stocks recovered to new highs. Of course, we are measuring the gold price in terms of U.S. dollars, and the dollar has been relatively strong, which means a lower price for gold.

It is not surprising that the dollar has been strong. But we have to ask, compared to what?

In measuring the U.S. dollar against the other major fiat currencies, it does actually look pretty good right now.

But a lot happened in the last week of October to rattle an already shaky gold market. The Fed announced an official end to its QE program, meaning there will be no more money creation for a while.

At the end of the week, the Bank of Japan (BOJ) announced it was ramping up its so-called stimulus, putting the Fed’s Keynesians to shame. The BOJ will be creating a ridiculous amount of new money in comparison to the size of its population and economy.

Again, it is no big surprise that the U.S. dollar is in high demand right now. It is the least bad of the major currencies.

Gold Charts

According to a Yahoo Finance article, the gold charts are suggesting there is more trouble ahead for gold. Specifically, the article said a move below $1,000 is likely, with resistance around $980.

Gold had been trading in a range between about $1,180 and $1,390 between April 2013 and October 2014. Now that the price has closed below the $1,180 mark, it indicates a strong downtrend — or so the charts say.

I like looking at historical charts and possible trends, as in many cases they can be helpful in making investment decisions. Sometimes these support levels do mean something, and they can help guide us.

But there is also a limit in using charts to predict the future. Past performance does not guarantee future results. It is perhaps one thing the SEC gets right in its disclaimer.

I have seen plenty of analysts make predictions about markets or particular stocks based on charts, only to be completely wrong. The so-called support levels or breakout levels ended up meaning nothing.

There is a reason for this.

Human Action

Ludwig von Mises is probably the most prominent figure in the Austrian School of economics (free market economics). Mises wrote a huge book on economics called Human Action, which was originally published in English in 1949.

The book lays out a case for free market capitalism, but it is based on the idea of human action. People engage in purposeful behavior, which must be considered when studying economics. We can discuss charts and graphs and mathematical formulas all day long, but they are almost meaningless without taking human action into consideration.

So we can look at a chart and say gold has broken below its support level of $1,180, but that is only one consideration in buying or selling gold. There are billions of people in this world, and each person’s decisions play a small part in shaping the overall economy.

The charts may say you should be selling gold right now, but what if 10,000 people wake up tomorrow morning and suddenly decide they want to buy gold? The charts mean almost nothing at that point. If more people want to buy gold, it is going to drive up the price.

We can also use charts for supply and demand, but it is virtually impossible to measure demand until after the fact. The reason is because you can’t accurately predict human behavior with an absolute degree of certainty. You can make general predictions on how humans are likely to act given certain circumstances, but there are no guarantees.

Based on fundamentals alone, gold should have been going up in price for the last year and a half. The Fed was creating massive amounts of money out of thin air, interest rates have been kept low, and the national debt keeps going higher.

But for some reason, most investors were focused on other things. Stocks have boomed because that is what people have demanded, whether or not you personally consider it rational.

Finding a Bottom

Because human behavior is not predictable with any absolute certainty, we can’t predict where the bottom will be for gold with any certainty.

We can’t predict the future of any investment with absolute certainty because we can’t read minds. I can’t even always predict what I am going to do from one day to the next.

With that said, we can look at the facts and make an educated guess on how people are likely to act.

If I see and hear a lot of people talking about a particular product or company in a positive light, I might be able to make a good assumption that the company’s profits and stock price will rise.

If the Fed creates a lot of monetary inflation and the banks are quick to lend out this new money (unlike the current situation), then I can take a good guess that prices are likely to rise in the near future. But it isn’t an absolute certainty because people may change their behavior in ways I couldn’t have predicted.

The gold charts may end up being right in the short term. Maybe gold will fall below $1,000 per ounce. If that happens, I am not worried about it. I will look at it as an opportunity to buy more at a discount.

But it is also quite possible that gold won’t go under $1,000. Some gold buyers may choose to ignore the charts and buy. Buyers can include foreign central banks or the little guy trying to protect some of his hard-earned savings.

The real question isn’t whether gold will go below $1,100 or $1,000 or $900. The big question is who will be smart enough to buy when nobody else wants to. Who will refuse to sell when most everyone else seems to be selling?

A Long-Term Outlook

Regardless of the charts and the short-term price movements, gold is an insurance policy against reckless politicians and central bankers.

There is a huge national debt, major unfunded liabilities, and a stock market that has been built up on Fed money. The Fed may be taking a break for now, but how long will it really last?

If we see a major downturn in stocks, or if we see the U.S. economy tip back into a recession, is the Fed really going to sit on its hands and do nothing? We can expect more Fed monetary inflation in the future.

Although we can’t predict human behavior, I am willing to make a bet on the behavior of central bankers. I will bet on central bankers resuming a policy of monetary inflation and artificially low interest rates. For that reason alone, I am willing to make a bet on gold in the long term.

Until next time,

Geoffrey Pike for Wealth Daily

Buffett's Envy: 50% Annual Returns, Guaranteed