Gold opened solidly higher this morning, reclaiming $1600 per ounce and then some. Silver also surged as both metals responded to a softer US Dollar. Near term technical advantage is still hard to determine as gold seems to have settled back into a trading range roughly marked by $1550 support and $1650 resistance. Which of those levels is breached first will likely determine the direction of the market for the remainder of the year.
Volume is expected to remain low in both the gold and silver futures markets as many of the institutional traders have closed their books for the holidays. This means that smaller players will have more influence on the market between now and the New Year. It also means that physical demand will likely play a more important role in the coming weeks.
The gold market in 2011 can really be described in a single word: volatile. We started the year around $1400 per ounce and surged as high as $1900 + before correcting back down to the current levels. Unlike almost every other year in this bull market (excluding 2008), gold’s pattern was much more of a mixed bag in 2011 as compared previous years which saw slow and steady increases. The continuing global turmoil has combined with increased investment and trading demand in gold which lead to violent price swings from oversold to overbought and back again. Like it or not, this is likely to continue into the foreseeable future as global currencies (namely the Dollar) swing wildly in response to faltering political and fiscal structures around the world.
The volatility seen in gold through 2011 has been a mixed bag for investors. Whereas a few years back one could simply cut the check and buy some gold without a lot of thought to the timing of the purchase, that strategy (or lack thereof) is simply not effective in this year’s market. As the swings have continued, it’s become increasingly important to pick solid, undervalued entry points when buying gold. Just ask those of us (myself included) who bought at $1900 per ounce.
On the other hand, the price swings in gold have given some buyers extraordinary opportunities to enter into this dynamic market at significantly undervalued levels. The dance between the Euro, the Dollar and gold has created some sell-offs (such as the one we are experiencing now) like we simply haven’t seen over the last several years. Ten percent corrections have been extremely few and far between since 2001, and represent the absolute best possible entry points into the gold market. Just look at the charts below showing gold’s daily close prices from 2010 and 2011 respectively.
You’ll notice in the 2010 chart that there really are no corrections of 10% or more in magnitude to use as good entry points into the market. The 2011 chart on the other hand shows multiple corrections that make for solid entry points in the market.
In the end, bull market volatility is usually hard on everyday investors. It makes big picture strategic thinking more difficult as we get caught up in the panic that comes with large scale market swings. Most people tend to make emotional decisions that are relatively short sighted. This is evidenced by the fact that our inquiries nearly doubled when gold broke $1900 per ounce as compared to what we receive now at $1600. The truth is that most investors tend to buy high and sell low. For some however, this increased volatility will be a tremendous opportunity to make smart strategic gold purchases at deeply discounted levels. Unfortunately, that sort of objective decision making is not the norm. This is why the market is relatively quiet right now. You’re not hearing the talking heads on CNBC telling you about gold as we go into the holidays. That’s probably the best possible indication that this is a good opportunity to buy the stuff.
Mike Getlin is Executive Vice President of Merit Financial, home to America's fastest growing physical gold IRA company. Please send comments or questions to firstname.lastname@example.org.