Investing in Gold Bullion Is All About Timing—Here’s How to Do It Right

Guest post by Investment Contrarians

People always ask me about gold bullion. They want to know if it’s the right time to get back into gold bullion as an investment. While many other advisors are advocating a wholesale abandonment of gold bullion, I believe the time to buy is close. 

Finding the proper entry point in the market is never easy, but there are several factors that combine to indicate an ideal investment opportunity. The first step to recognizing when the investment opportunity arises is to understand some gold bullion fundamentals. 

While most people are aware that the retail public has been buying gold bullion in huge quantities (as seen by the record sales from the federal government through the U.S. Mint), they may not know about the profound demand from nations like India and China. And even that level of demand still has been far less than the amount of gold bullion sold by investors in exchange-traded funds (ETFs). With ETFs selling close to 600 metric tons so far in 2013, demand for gold bullion far outweighs supply. 

Recent price action is indicating that a short-term bottom is close at hand. Price action is extremely important when it comes to determining how good an investment opportunity really is—whether for gold bullion or any other asset. 

As an example, just a few days ago I wrote the article “Are You Missing a Great Investment Opportunity in Precious Metals?” in which I discussed the investment opportunity in platinum. While there will be a deficit for platinum, it’s important to watch the price action for indications that the price of platinum is getting close to a bottom—the most favorable investment opportunity. 

At the time I wrote the article, the price for platinum was a $1,299.50. Just a couple days later, the price for platinum moved quite favorably—it’s now trading almost $100.00 higher. 

Similarly, it’s important to watch the price action of gold bullion. While there is an investment opportunity, mistiming it could prove costly. 

The chart for gold bullion from August 2012 to July 2013 is featured below:

Chart courtesy of www.StockCharts.com 

Over the last few days, there have been very bullish moves in the price action of gold bullion. It appears, at least over the short term, that demand is now beginning to overcome the level of supply. 

The horizontal lines on the chart above represent the Fibonacci retracement zones from high to low on the recent moves in gold bullion. For those skeptical of technical analysis, the Fibonacci calculations for the retracement areas have proven quite prescient, as noted by previous areas in which gold bullion temporarily halted its decline. 

While there are still many long-term headwinds in store for gold bullion, it appears to me to be a good short-term investment opportunity right now. I would use these Fibonacci retracement areas as possible target zones for a move up, with a tight stop placed below. 

Fundamentally, one bullish impact of the low price of gold bullion is that some miners will need to slow or stop production until the price of gold bullion becomes lower than the cost of production. That temporarily lowers supply, which will increase the price of gold bullion, even if demand remains the same. 

We are entering a new dynamic for gold bullion, as the asset purchase program by the Federal Reserve is likely to end over the next year, which will prompt higher interest rates. Higher interest rates are negative for gold bullion in an environment of low inflation, since the cost to carry gold bullion increases. But we don’t know for sure when interest rates will rise or if inflation will remain low. Historically, the Fed has been behind the curve, and I think there is a chance that inflation will soon begin to accelerate much faster than people are expecting. 

Over the short term, I do think that gold bullion might have hit bottom and could move up into the $1,400 to $1,500 area. At this point, the risk to reward as an investment opportunity for gold bullion looks favorable.

~ by Sasha Cekerevac, BA 

This article Investing in Gold Bullion Is All About Timing—Here’s How to Do It Right was originally published at Investment Contrarians