The Challenges of Timing Gold Investments
The more predictable these longer term trends are, the better, as this will allow us to act with more certainty, which makes the success of our investments more likely. With something like gold though, it is more challenging to predict where prices will go over a given period of time.
There really isn’t the same long term bias to the upside with gold as there is with stocks, and while gold does tend to go up in price over time, it does not rise with the same magnitude as stocks do. Gold is more like bonds, where you basically see it keeping up with inflation but long term really doesn’t outperform it very much.
This does not necessarily mean that there is less upside with gold than with stocks, and although this is certainly the case generally, at certain times gold can rise pretty dramatically as well. It all depends on what is going on in the market, like when so many people rushed to gold in the period between 2008-2011 where the price nearly tripled.
This was part of a longer upward trend which lasted about 10 years and saw gold rise from a little over $250 an ounce to almost $1900. This is a very significant bull run by any measure, as was the bear market that subsequently kicked in after the rise was over where the price dropped $800 an ounce over the next 4 years.
On the other hand, we can go through periods of 10 or 15 years where the price of gold really doesn’t change much, and when we look at the longest time frames, we see that the overall rate of return of gold is pretty modest indeed.
Gold therefore isn’t an investment that we should ever just blindly invest in like we do with stocks, and timing with gold investments is even more important, where we enter the market and where we exit or plan on exiting.
It is also tricker to time gold investments, as the price of gold is driven by a number of factors, and this leads to less predictability in deciding what sort of trend we are currently in. This is especially the case over the last few years, where there has been quite a bit of volatility but no real sustained trends, seeing the market move up and down in a way that may suit traders who are looking to capture these smaller, short term moves, but not the kind that investors can really latch on to with their longer time frames.
When we see this more range bound trading, like the environment we are in with gold right now, it makes it more difficult to decide what the longer term trends will be. Looking at the gold chart of today, we see a range roughly between $1100 and $1300 an ounce, but no clear direction as far as where it might go if it breaks out of this trend on one side or another.
Balancing the Upside of Gold with the Risks
Investing should never be a guessing game, and we really do need the probabilities on our side, but there are times where the probabilities are not sufficiently favorable to either overcome the risk involved or especially to make investing in gold a good choice from an opportunity cost perspective, relative to investing in the stock market for instance.
People generally invest on the long side, where they profit from increases in price and hope that this occurs, and when things turn to the downside the options are really limited to selling off and putting their money elsewhere.
Given that the stock market both holds greater potential for gains and also tends to behave in a way that is more predictable, we should probably look to the potential gains on the long side with stocks first, and really only look to investing in gold as either a secondary investment for diversification purposes or to move to more when the stock market isn’t really moving in our favor during a given period.
Whenever we do invest in gold though, even if it is just a sideline component to our portfolios, we do need to ensure that the particular investment has enough potential for gain to offset the risks to the downside that the investment involves.
Given that gold is less predictable, and managing risk is best accomplished with better predictability, we can safely say that gold investments are inherently more risky overall, and therefore must be managed more cautiously.
This is not to say that we cannot achieve a desirable level of predictability in the gold market and also select situations where risk is lower and therefore can be managed well, but this is more challenging with gold and will require that we more tightly manage our investments compared to what we might want to do with stock positions.
With stocks, we are often willing to let our positions ride more so to speak and allow them more room, and the reason for this is that the longer term trend may still be in our favor and we may understand these moves against us as just smaller pullbacks within longer trends that are favorable to us.
This can happen with gold as well, but since these longer term favorable trends are less common, and less predictable as well, we need to be more careful with shorter term moves against us.
This is especially the case given that investors will tend to hold on to positions too long and then may exit out of fear or even panic, and we never want to have negative emotions like this guide our investing decisions. Should one invest in gold at the wrong time, one may suffer significant losses and also realize those losses when perhaps they should have held on at that point, as the pullback nears its end and a rebound may more likely be in store.
Where is the Market Going Now?
Even though it might be harder to predict where the price of gold is heading, this should never mean that we don’t want to pay attention to where it more likely will be headed. When we fail to make any attempt at this, we are just subjecting our investments to randomness, relying on hope exclusively to achieve success.
We need to be doing this with all investments, where it’s important to both time our entries and exits, and when an entry is timed wrong and we enter when things are moving against us, that’s usually what ends up continuing. If we instead waited until a more favorable time, the losses that result from poor entries can often be avoided, which is always preferable.
There will always be the potential that by waiting, things may move in our favor instead, and instead of missing out on losses we will miss out on gains, but this always needs to be about what is more likely to happen given what we know at the time, not about what ends up happening in a given instance.
The same principle applies when we’re looking to exit our gold investments, and no one knows for sure whether an entry or exit will end up being right in this case, and all we can do is go with what is more likely to happen.
With shorter term trading of something like gold, this is made easier, as shorter term trends with gold are more predictable and one can just stay with the current trend in the time frame one is trading in. In this sense, trading gold isn’t really that different from trading anything, and it is in the longer term timeframes that it behaves so differently from the fact that longer term trends are not so obvious at certain times.
In other times they are though, and gold can enjoy the same momentum that other investments can, and momentum with gold can really have the price moving one way or another pretty dramatically at times.
The key though is to determine when we are in these times or whether we are in different times where it’s more difficult to predict over the time frames investors seek to invest in, like it is right now for example.
There are actually three different types of markets, bull, bear, and flat, and we want to make sure that we are investing in gold during bull phases and look to steer clear during both bear and flat periods, or any period where the upward trend is not obvious enough to give us enough of an edge.