Is It Time To Buy Gold?
It’s been an interesting, unpredictable year for gold. The widely held and closely followed precious metal has taken on a different role lately – after being in the spotlight for much of the post-financial crisis period.
You see, the yellow metal’s massive popularity was due to the political and economic landscape at the time. Circumstances drove investors of all types – from retail to central banks – into the relative safety of gold.
After all, gold has been cherished for thousands of years. Why stop now?
Here’s the thing…
Ultimately, gold is a safe-haven investment for those worried about two major scenarios – high inflation or an unstable currency. For instance, many in the US were worried about high inflation due to the huge amount of liquidity being injected into the banking system. And in Europe, the Euro was considered risky due to the possibility of a collapse of the monetary union.
In both cases, investors flocked to gold.
However, once the situations stabilized (no inflation reared its head in the US, Europe’s economy stabilized), investors moved from gold to riskier assets. That’s why the price of gold has plunged 20% so far this year.
However, gold has once again caught a bid. The price has come charging back from a low of around $1,200 an ounce in mid-summer, to roughly $1,320. It’s a far cry from the 2011 highs of over $1,800, but a big move higher nonetheless.
So what’s driving the turnaround this time?
Once again, it’s a familiar culprit – inflation. There’s still a contingent of investors who believe as long as the Fed keeps injecting liquidity into the economy, at some point rampant inflation will hit.
With the recent government shutdown, the Fed likely won’t slow its bond purchases until 2014. This means the $85 billion per month purchase program will keep going. And, some investors are using that as a reason to get back into gold.
Personally, I don’t believe inflation will be a concern any time soon. Still, I wouldn’t bet against gold either. Too many investors like to own gold, including very influential ones. So, while I may not bet on gold’s upside, I certainly believe there’s a limit to how far the price can fall.
One options strategy to take advantage of this exact scenario is put selling. If you believe gold has a floor to how far it can fall, sell puts at that level. It could be a good way to collect steady income from gold for the next several months, without having to pick a direction.
Yours in Profit,
Gordon Lewis
Category: Commodities, Options Trading
