Gold Drops: A Time to Buy?

A time to buy gold is any time that the price of gold dips in price where there is the expectation that the price will again rise in value. An obvious statement that is penned between the arguments of the bull investors and the bear investors. Let’s break it down and see if we can settle the argument.

The Bull Market is best described as a market where share prices are continuing to rise. This is an investors market and the primary focus is on buying shares. A Bear Market, on the other hand, is a market where the prices of shares are falling. The focus of a bear market is selling off of shares.

So if, your aim as in investor is to make money from your investment then both of those terms are important. The idea of investing is to buy low and sell high. High of course is subjective and should be ultimately defined by a percentage of gain based on your individual investment plan.

The most confusing thing about a bull market or a bear market is best defined as “what-the-next-day-brings.” What this means is that every day the market changes, prices rise or fall, sometimes those trends last for a week, month, or even years. In the case of the current bull market, those trends have lasted for 12 years. Yet every day, month, and year, there are peaks and valleys that are created by how the price of gold changes.

Think of the market like this: The glass is half full (bull), or the glass is half empty (bear). A mind set that sees the glass half full expects that there is room to fill the glass more (increased value of shares,) while the mind set that sees the glass as half empty expects that volume in the glass will decline (prices of shares will fall.) That is the epitome of what is happening right now with gold.

Over the last 12 years, gold has reached some outstanding prices per ounce, and it has fallen back in price from those outstanding marks. The bull investors expect the prices to rise even higher, and the bear investors expect that the price of gold will fall and continue to fall.

Things that Effect the Gold Market

Each side speculates. Speculates is an awesome word that basically means an educated guess, but a guess non-the-less. The bears speculate that the price of gold is going to plummet back down to the pre-bull market prices of a $400-$500 range. They guess this because of the recent drop in gold pricing, and constraints that gold mining companies face. The bears, on the other hand, see the demand for gold rising. They see that countries like China, Australia, India, Dubai, and Japan have investors lined up in the streets to buy gold, and the fact that governments that are not tied to the gold standard are just going to print money. Both arguments have merit, but both can not be correct. So which is it going to be?

That is the billion dollar question, so what does this mean for the everyday gold investor? It means a couple of things. First, the strategic details of your investment plan are what needs to be the focus. Second, pay close attention to the value of currency. The lower the value of a currency falls, the higher the price of gold will rise.

Tie It All Together

If the bears are correct, then the value of currency will need to rise significantly. If the bulls are correct, then the value of currency is either going to remain somewhat the same or fall. Given that governments move so slowly to correct anything, it seems more likely that the value of currency will remain as it is at least for the mean time.

Within the American market, we continue to hear about issues like the Fiscal Cliff, and sequester cuts and both are not lending to rapid recovery, rather they are indicating the continuing struggle of the American government to stem the tide of recession. Which type of market do you see in the near future? What about the far off future?