Is the trend still an investor's friend when it comes to gold?
That trader adage suggests that investors should buy sectors with recent positive returns. Doing this, instead of trying to get in front of the market's trend, could lead to bigger profits.
It can also be easier than trying to pick short-term market tops and bottoms.
Trend followers try to buy a market or security at the perfect moment and sell it when the trend comes to an end. It is like investing with the wind at one's back, until the direction of the wind changes.
Following trends shouldn't be the focal point of any investor's strategy. Sometimes following the crowd can lose an investor a lot of money very quickly, so jumping on the bandwagon isn't always worth it.
Investing should be based on good fundamentals and research.
So, if a stock has been going up, and the fundamentals say there is still room for growth, there is nothing wrong with buying it. But if the numbers say that the stock could be in trouble, it is time to either sell it or avoid it.
As the saying goes, "Cut losses, and let profits run."
Enormous long-term gains can be made using this strategy, especially when it is supported by other very good reasons to buy or sell an asset.
Gold prices peaked on July 6 but have since fallen 7%.
The Philadelphia Gold and Silver Index, which tracks the share prices of gold mining companies has fallen 25%. But the price of gold is still up 20% since January, and the index is up 86%.
It hurts to watch the price of an asset one owns drop suddenly. Watching profits fade away is awful even for those who have been following their stop-loss levels.
However, the drop in gold prices represents an opportunity. Now is the chance to jump onto a trend that still has a lot further to go.
Some gold speculators will sell into near-term price weakness, fearful that the ride is over. But smart gold investors will use this weakness to earn long-term profits by entering the market or adding to their positions.
And how can investors find their way through the gold market, follow the trend and end up with big profits?
True trend followers don't attempt to predict when a trend will end. Instead, they try to hold an asset until the price momentum changes.
One of the simplest measures of price momentum is the 200-day simple moving average. This gives the average value of a security's price over the past 200 days.
The 200-day moving average is plotted on a price chart to create a moving average line. Each day, the line changes.
If the price of the security keeps rising, the 200-day moving average will show an upward sloping line. If the price falls, the line will slope downward.
Plotting the slope of the 200-day moving average can help an investor understand the market's trend. If the 200-day moving average is higher than the previous day's, the slope is positive, and the trend is upwards.
Similarly, if the 200-day moving average is lower than the previous day's, the slope is negative and there is a downtrend.
The 200-day moving average suggests that despite its recent price drop the overall price momentum of gold is up. Gold investors should view the decline in the price as an opportunity to buy.
Although investors shouldn't use it as a stand-alone indicator, the 200-day moving average can be a useful tool to support an investing strategy. This basic market indicator would have served gold investors quite well over the years.
Consider what happened to gold after the 2008 financial meltdown (see the chart, below).
In December 2008, the slope of gold's 200-day moving average switched from negative to positive. Investors who bought when the uptrend began would have almost doubled their investment if they sold when the 200-day moving average turned negative again in late 2011.
However, notice what happened from November 2009 to January 2010: Gold prices pulled back nearly 9%.
Newspaper headlines talked about "the end of the gold bull market."
Half-hearted investors who focused on price volatility sold their gold positions. Those trend followers who managed to hold on for the long term earned big gains, though they might have spent some time on the edges of their seats.
Of course, this is no guarantee that the price of gold will stop falling, but the fundamentals that led to its sharp rise this year still hold true. This just further supports the idea that gold will rise again.
Here are some reasons it looks like gold will keep rising in the coming months:
Side effects of NIRP. When the uptrend started in February of this year, gold's surge coincided with Japan's and the eurozone's continued acceleration of negative interest rate policy.
Central banks hope to encourage savers to spend their money by charging people to keep their money in bank accounts. The hope was that they would put their money to work buying things and investing in the economy, but so far that plan has failed.
This has put positive pressure on gold prices because the lack of income generation is one reason some investors don't hold gold or other precious metals. But if investors need to pay to keep their money in a bank account, gold and other precious metals suddenly become much more attractive, especially when prices rise.
Alternative to fiat (paper) money. Since 2008, paper money has become less valuable, thanks to quantitative easing and NIRP. Printing more money serves to devalue it.
As it stands, no one quite knows when or where this will end or what will happen as the global economy becomes more addicted to the adrenaline hit of cash.
Ever since ancient times, gold has been a good store of value. Its worth as an alternative currency will probably increase.
Market bubbles may soon burst. NIRP is causing bubbles and confusing distortions in markets all over the world. Investors are looking anywhere they can to find returns, especially when the alternative is zero or negative interest rates.
Assets are being driven to prices that are unwarranted by the underlying fundamentals. And many real estate and equity market bubbles are being inflated by central banks printing "free money."
When these bubbles pop, as they inevitably will, many investors will look to gold as a refuge.
Two massive interests are buying gold. China and the Muslim world have become major players in the gold economy.
China has been aggressively buying gold for several years now and will likely continue to buy gold amid the weakness, solidifying gold prices. Also, more of the 1.6 billion Muslims in the world may enter the market as gold investments under Shariah law are further clarified.
Global uncertainty and the Brexit. Gold's recent spike came shortly after the U.K. voted to leave the European Union. Uncertainty and fear skyrocketed globally.
Although worries over Brexit have declined, they may come back with a vengeance. The U.K.'s withdrawal is likely to get messy, and as that happens, other countries may try to leave the EU.
And with concerns that Europe's biggest bank could be going bust, markets all over the world are shuddering. Gold is historically good insurance and one that tends to go up when everything else seems to be going down.
Republican presidential candidate Donald Trump. Part of gold's recent decline could be due to his slumping chances of becoming president. But even if Democratic candidate Hillary Clinton is elected, the celebrations are likely to be short-lived.
Trump's popularity reveals an underlying feeling of discontent among many Americans that isn't going away soon.
Whether or not he becomes president, other politicians will surely follow his path. Trump's protectionist sentiments reflect a global phenomenon that will have repercussions all over the world in the coming months.
So, use this chance to build up gold holdings, even while short-sighted investors get out. There are of course no guarantees and investors should as always maintain their stop-loss orders, but many signs point to a continued uptrend in gold prices.
To get the full story on gold and why to own it click here for this free report.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the investments mentioned.