To Buy Gold or Sell Gold – Know the Dollar

• Oct 3, 2009, Mark Solomon
• Original Article: To Buy Gold or Sell Gold – Know the Dollar

Buying gold cheaply and selling it expensively requires understanding the U.S. dollar price movements as shown in the USDX index. The USDX almost sets the gold price.

Parts 1 and 2 in this series covered several primary factors driving the price of gold both up and down. Seasonal trends of commodity trading, political decisions, gold bullion or gold coin marketing, plus fundamental supply and demand issues all drive the spot price of gold. Since gold is priced in U.S. dollars, the value of the USD, as shown generally in the USDX or U.S. dollar index, is primary for the recognized value of precious metals and gold specifically.

USDX Influences Gold Prices Inversely

Six currencies including the Euro, Yen, Swiss Franc, British Pound, Canadian Dollar, and the Swedish Krona make up the USDX. Reuters news agency calculates the USDX giving the following weights to each currency according to Forex Ltd U.K.:

• Euro 57.6%
• Yen 13.6%
• Pound 11.9%
• Canadian Dollar 9.1%
• Krona 4.2%
• Swiss Franc 3.6%

The USDX formula is supposed to represent how U.S. trading partners value the dollar. Unfortunately the Chinese Yuan is not included in the formula detracting somewhat from the value of the USDX as an indicator. The U.S. trades over $400 billion of goods and services with China in 2008 representing over 12% of U.S. global trade volume (Source: China-U.S. Trade Issues, Wayne M. Morrison, Congressional Research Service, June 23, 2009).

Since China pegs the Yuan to the dollar within a narrow and rising range, the USDX still works reasonably well in its’ role of predicting trends with the gold price. Generally, when the USDX rises, the gold price falls. As the USDX falls, the gold price usually rises. Think of a see-saw. Gold is on one side, and the value of the USDX sits on the other side.

Proof of the USDX and gold price relationship appears in the accompanying chart below constructed by Zeal Intelligence, LL.C. This chart displays the gold price versus the USDX value from 2001 through 2008. The relationship is strongly inverse, though not perfectly so.

Predicting Gold Prices with the USDX

Importantly, the USDX drives the price of gold rather than the other way around. Gold rising in price follows the USDX dropping in value. The same principle applies when gold falls. The challenge is predicting the value of the USDX.

Trend predicting carries through the same general technical tools from one market to another. Technical analysis of the volume trends, resistance areas, momentum of the price moves and the rate of rises versus falls can strongly move the odds in favor of a profitable USDX trade indicator. Once the trend for the USDX becomes clear, the direction of the gold price follows.

Awareness of the primary 5 factors driving the gold price can provide investors the keys for buying cheap gold and selling expensive gold. Profit follows with the proper timing of the gold coin or gold bullion purchases.

Buy Gold or Sell Gold Now?

Buy Cheap Gold, Sell Expensive Gold- Timing Gold Prices

• Oct 2, 2009, Mark Solomon
• Original Article: Buy Gold or Sell Gold Now?

Buy gold when the price has come off a recent high. Sell gold when the gold price has risen. Applying gold price analysis can alert gold investors to buy/sell signals.

Bill Miller, Michael Steinhardt, Warren Buffet, and Jesse Livermore all beat the stock market average returns during their investment careers. Steinhardt produced average compounded returns of over 24% while the S&P500 averaged about 8%. This performance alone decapitates the Efficient Market Theory.

Buying Gold, Selling Gold: Good Timing = Good Profits

Efficient Market Theory came from Prof. Fama at the Univ. of Chicago Booth School of Business in the 60′s. This theory lead to the Wall Street mantra of “an investor can’t beat the market, so invest for the long term.” For Wall Street bankers and stock brokers, the money keeps rolling in. For investors, keeping money in a market- even the gold market- without regard to price cycles can lose money in a portfolio.

Buying gold in the form of gold coins, gold bars, bullion gold, or gold ETF’s requires becoming acquainted with some well known market cycles. Unfortunately, most gold buying occurs when the gold price rises dramatically and makes news. Gold selling by the general public often occurs when the gold price drops. Following the herd when buying and selling gold- or any investment- can lead to dramatic losses.

By following gold market timing principles, an investor could have sold gold investments in 2008 near the peak of $1000. After gold prices dropped to the $800 level, a fast acting technical trader could have bought back in and enjoyed a more than 20% return on investment year over year. That is the essence of buying gold and selling gold for profit.

When to Buy Gold and When to Sell Gold

A number of factors affect the price of gold.

1. The rise and fall of the U.S. dollar as reflected in the USDX.
2. Seasonal trends in gold coins, gold bars, gold bullion, and gold jewelry buying.
3. Political changes including economic summits, reports, potential conflicts.
4. Supply and demand fundamentals with mining production and investor purchases.
5. Gold coin and gold bullion marketing to investors.

While these 5 factors interplay between each other, they have distinct effects.

Factor number 5 was demonstrated when famous silver analyst Ted Butler’s friend I. Friedman wrote an article recommending purchase of U.S. Silver Eagles. Almost immediately, the U.S. Silver Eagle program experienced record demand for silver coins. Gold coin marketing has had a similar effect. Even the Chinese government has recommended gold coin and silver coin purchases.

Factor 4 generally drives long term price fluctuations though it can quickly change markets if a country or mine shuts down production. Great surges in demand can also cause gold coin prices to rocket higher. Recall the effect Ford Motor had on the palladium market when it sent the metal from $60 to $1100 by stockpiling because it feared a shortage. The same dramatic rise can occur with the tiny gold market.

Factors 1, 2, and 3 push gold prices on a day to day basis more predictably than either 4 or 5. Understanding how the USDX trends, seasonal effects, and political changes move the gold price puts the trading odds in a gold investors favor. Another article will explore these factors in enough detail for a gold investor to apply them in making potentially profitable trades.