Buying Opportunity for Gold

September 15th, 2016 by

There is a well-known strategy used by Wall St traders that is also relevant for the gold market: “buying the dips.”

This approach essentially relies on identifying markets that are firmly in an uptrend and then capitalizing any time prices face a momentary “dip” by scooping up more shares—or, in the case of gold, more ounces—at the temporarily lower prices.

Particularly if you’re of the mind that the gold market is generally on an upward trajectory, buying on the dips is a viable approach for growing one’s gold stockpile.

What Is “Buying the Dips”?

stock rallyMarkets do not move in a perfectly linear fashion. If they did, it would be a sign of the end of human involvement in trading: Only computer programs that are divorced from reality could produce that kind of “perfect” result. Even though most traders behave rationally, there will always be peaks and valleys in prices over any given time span. This is why stock charts and the like always have those jagged, zig-zag lines.

This holds true even in a firm market trend. During an upswing, there are still going to be days in which unfavorable news, low trading volumes, or some other factor causes prices to drop. These moments are the aforementioned “dips” that can be so attractive to savvy investors.

The logic is simple: the dip represents a brief moment where prices are cheaper than normal (even though the fundamentals of the underlying asset haven’t changed). It’s like someone is telling you, “I’ll give you this dollar for 90 cents,” and you’re reasonably confident that it will again be worth $1 (or more) in the coming days or weeks.

The Opportunity for Gold

After rising nearly 30% through the first half of the year, the gold market has been in a bit of a lull over the past month or so. This has something to do with the increasing speculation that the Federal Reserve might choose to raise interest rates sooner than was previously expected—specifically, as soon as the next meeting of the Fed’s Open Market Committee (FOMC) on September 20th and 21st.

custom-fed-sealGold is very sensitive to changes in interest rates, hence the recent pullback. However, the smart money doesn’t seem to expect any movement from the Fed in the current economic environment. A tool called FedWatch used to represent the likelihood (and timing) of rate hikes based on the trading of futures contracts for the federal funds rate only gives a 12% chance of a September move by the FOMC.

Perhaps more importantly, over the longer run, the Fed has virtually no clear path to continue raising interest rates at a steady pace. In other words, irrespective of what the Fed does in September (or November or December, for that matter), the interest-rate landscape should remain low in the U.S. for the next year or two at minimum. This works in gold’s favor—and makes any jitters that send gold prices lower a prime candidate for buying on a dip.

Besides the influence of the Fed and monetary policy, keep in mind that a controversial or contested presidential election in the U.S. has the potential to stimulate safe haven flight into gold. No matter which party wins the election, more than half of the country is going to be appalled with the result in this cycle. Don’t be shocked if this general dissatisfaction generates some added demand for gold, as well.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.