A Day of Records: Will Gold Fall Back?

Dear Reader,

It appears it’s a day of records.

Victoria hit a brand-new high of 723 ‘rona cases this morning.

Over in the west, Fortescue Metal Group Ltd [ASX:FMG] announced they shipped a record amount of iron ore. Some 47.3 million tonnes of FMG red dirt left the nearest Pilbara port.

Without going through the report myself, I’m guessing that most — if not all — headed up through the guts of the South China Sea and straight into Chinese steel mills.

Oh, and the US dollar gold price spiked to US$1,981 in overnight trade.

That means two gs next, right?

Well, not quite…

 

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History says gold will fall first

In an interview I did with Andy Schectman of Miles Franklin Precious Metals as part of the Sprott Natural Resources Symposium last week, he told me his father would only let him into the family business if he promised to buy gold every two weeks on ‘pay day’.

So, Andy has bought the metal every two weeks for 30 years.

Long-time gold investors know this well. They often buy gold because it’s a habit. Swapping fiat dollars for gold is part of long-term wealth accumulation.

New investors to gold don’t know this.

When gold hits a new high the main financial rags scramble to cover the price spike.

This new mainstream attention then drives new people to the metal.

And newish gold investors tend to rush, buy at the new highs, then get dismayed as the price falls away.

I’m here to give you a pro tip.

If gold is in the headlines, it’s not the day to buy.

If you see gold making a new all-time high, it’s not the day to buy.

Rather purchasing gold is about creating new financial habits.

However, with gold getting all the headlines at the moment over the new price high, does that mean you’ve missed out on the rally?

Not even close.

Let me show you what I mean.

Back in February 2003, the gold price cracked a new high of US$390. I have no doubt early gold investors got excited. But after this new high, the price fell and traded sideways for six months.

It didn’t reach US$390 again until September 2003. From here there was a neat rally into April 2004, where gold hit another new high of US$431.

After that ‘new high’ the metal dipped and went sideways for six months.

Come November 2004, gold peaked a little higher — another ‘all-time high’ at the time — to US$455.

After that, guess what happened?

That’s right, it dipped back down.

It was nothing but sideways action until September 2005 when gold hit US$475 and that’s when the rally really picked up steam, moving all the way up to US$728 by May 2006. A massive 53% run up in just seven months.

The thing is, after this enormous surge, the gold price dived. Those 16 months between May 2006 and September 2007 saw the yellow metal dip as much as 25% lower.

The next leg of the gold rally didn’t really begin until September 2007. Arguably giving the metal some breathing space.

That’s six new price highs in four years. And almost every new high is followed by a dip back down…

My point is you didn’t miss the rally.

Gold may be up almost 30% over 2020, but history tells us after a massive rally comes a price fall.

Which really, is just a buying opportunity…

Futures say US$2,000 is coming…in 2021

Gold is a funny beast.

No one gives a rat’s backside about it until it’s in the headlines.

And those who cover it before it’s in the headlines are ‘gold bugs’ who are often quoted as paranoid or obsessed with a shiny pet rock.

The mainstream tend to cover the precious metal when it hits new highs.

They roll out an expert or two to talk about why it’s hitting new highs. They almost always rustle up a banking expert that offers some sort of short-term insight into what gold is doing and why gold is doing it.

The answers they give are so predictable it’s laughable. ‘The financial system is showing signs of stress’, ‘Global uncertainty’, ‘Gold does well in low interest rate environments’, or my favourite — ‘People are buying into gold because they are worried about inflation.’

These experts forget to mention that the time to buy gold isn’t when it’s in the headlines making new highs…

In fact, that’s the worst time to buy gold. When gold hits the headlines there’s a surge of retail investor demand.

Premiums over the spot price go up in times of high demand. Meaning you’re paying more for the metal than if you bought earlier or waited until after the price spike.

Not only that, the sudden rush of investors means that the smaller bars tend to sell out. The machines can’t keep up with demand and people then must wait to take physical delivery of the metal.

And all that new demand, price spike, and waiting for the precious metal adds to the internet myth that a ‘shortage’ of gold is happening.

In fact, given these recent price highs, I wouldn’t be surprised to see my inbox flooded with messages from readers again enquiring as to why bullion dealers are ‘running out’. It’s not that bullion dealers are running out. It’s that investor demand outpaces the machines that are operating almost 24 hours a day.

So, here’s your takeaway today: Wait it out.

The paper market will likely see many people start taking profits. We will see the spot price of gold fall in the next couple of weeks.

And at the risk of looking foolish, I’m still not convinced gold will hit two gs per ounce this year.

Perhaps in the next day or two we’ll get within a whisker of it.

But I’m not entirely sure 2020 is the year gold moves into that new price point.

Right now, the June 2021 futures suggests gold will be over $2k by then. And that’s roughly my timeline as well.

The pet rock price rise may have caught everyone off guard, but you haven’t missed the chance to buy in.

If anything, gold will fall back, and disappear from the headlines.

And that’s exactly when you want to buy precious metals. When no one is looking at them.

Until next time,

Shae Russell,
Editor, The Daily Reckoning Australia