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The Washington Independent

Why is Gold a massive buying opportunity right now?

Why is Gold a massive buying opportunity right now?

Gold stocks breakdown, gold price behavior, gold will finally shine, india's impact on gold price, facts about gold stocks, dear retail investors

Anderson Patterson
Finance
Sep 24, 2021

Table of Contents

From ancient times to today, gold has been valued highly by society. At first, gold was used as currency or in jewelry. 

However, due to its conductive properties, recent years have seen gold finding a new purpose in electronics. Everything from medical devices to electric cars uses small amounts of gold to operate.

Historically, investors have used a hedge against inflation or economic downtimes because of its high value.

But over the past few months, gold’s value has dropped due to improving conditions.

So why would now be a great gold buying opportunity?

Let’s take a look at what’s happened with gold this year and show you why holding onto your gold assets is beneficial down the road. 

Gold stocks breakdown

Although gold is a highly valued commodity, it’s still vulnerable to price fluctuations and breakdowns. 

But what constitutes a breakdown in gold?

A breakdown occurs when the price of a commodity dips below its support level, which is a price point that it had dipped to in previous years.

You may be wondering “how far below the support level does a price need to be to constitute a breakdown?”

Some experts consider it to be a  breakdown if prices fall 3% the support level or 1% in the short term, high volume follows, and prices stay down for 3 consecutive trading days.

Unfortunately, what we’ve seen in recent months is a breakdown in gold. And from bad to worse, there could be more downside on the way.

HUI, a gold index, and GDXJ, a gold ETF, were trading at new yearly lows in August 2021. HUI slid about 10% from its support level, while GDXJ sat at $35 and $34, which marks a 62% drop from its 2016-2020 run.

Although more downside may be on the way for gold, it is not time to panic. With prices dipping, it could be a great opportunity to buy, cautiously of course. 

Despite the gold stocks breakdown, there may be a gold buying opportunity for you on the horizon. 

Facts about Gold stocks

One of the largest factors about gold’s weak performance over the past few months is due to concerns that the Fed will hike interest rates.

While this speculation over hiked rates scared some investors into panic selling their gold assets, they may have opened up a perfect opportunity for you.

One of the widely known facts about gold stocks is that a rising interest rate is not good for gold. However, this isn’t always the case.

For example, in December 2015 and December 2018, the Fed raised rates, yet gold prices went up from $1,050 to $1,270.

This isn’t to say the same scenario is about to play out. Rather, a little cautious optimism can go a long way.

Gold is losing momentum, but experts see correction as buying opportunity

While the outlook for gold is bearish, some experts don’t believe it will last long.

Commitments of Traders reports show that the first week of June marked the first time in six weeks that gold’s net length dropped.

The report showed money managers decreasing speculative gross long positions in Comex gold futures by 2,223 contracts. During the same period, short postings went up by only 76 contracts.

Analysts are saying this info indicates algorithmic trend followers are driving money manager positions. They also note that prices may be vulnerable to a near-term pullback, as short coverings seem to have lost momentum.

As inflation pressures continue to mount and with the Fed not in a rush to increase interest rates—some experts see a gold buying opportunity.

Why Gold will finally shine as we enter market down leg

While the gold market seems to be on a downward trend for a time, that time won’t last forever.

After a rough end to 2020, gold stocks lagged and were left out of recent market rallies.

So how long until gold will finally shine? ​

Everything seems to be falling into place for a complete turnaround for gold. 

And unlike in the 2008 and 2020 market crashes—where the dip in gold happens before the rip—now may be the best time to get in on gold before the rebound begins. 

Gold price behavior

This past year has shown how valuable a gold investment can be, as prices rose to a high of $2,067 per ounce in August of 2020.

Prices since then have seen some ups and downs, with February of 2021 marking a new low not seen since 2016.

But what caused this swing in gold price behavior?

Several factors affect gold’s price including, demand, current economic conditions, and supply.

The world’s supply of gold hasn’t changed much in recent years—that’s because it’s incredibly difficult to mine, and most of the gold near the surface has been mined.

But supply still affects the price of gold. When miners need to work harder to reach gold buried deep, it drives up their costs. These extra mining costs can sometimes result in increased prices for the yellow metal.

Luckily for the world, but unfortunately for gold, economic conditions have improved due to vaccines.

With economies worldwide improving, investors were reluctant to continue buying up gold, causing a drop in demand. A drop in demand then caused a drop in prices that we saw in February and March of this year.

So why is gold still a great buying opportunity?

Well, unless you have a crystal ball that can tell the future—nothing is certain.

Despite multiple working vaccines, a new strain of COVID or rising inflation could cause a change in demand, driving prices back up.

But you can prepare for the turmoil of tomorrow with an investment in gold today.

And, as mentioned earlier, the conditions we’re seeing in the gold market won’t last forever.

Getting in on gold before the rebound happens could help you realize a larger return on your investment.

India's impact on Gold price

Boasting the second-largest population in the world, India also happens to be the second-largest consumer of gold.

In India, gold— in the form of jewelry or coins—is heavily consumed for festivals, weddings, and more.

Due to the COVID-19 pandemic shutting down most of these celebrations, the appetite for the yellow metal plunged about 35%.

In 2019, gold demand in India dropped 9% due to rising prices.

But it’s 2021 and most of the world has access to at least one working vaccine.

This has many believing that all the delayed celebrations will lead to a massive boom in gold demand from India.

To add to the speculation, the Indian government has already reduced its gold import tax from 12.5% to 7.5%.

There is no telling how large India’s impact on gold price will be, but it’s shaping up to be quite significant. 

How to invest in Gold

Planning on making this year the year you invest in gold? You’ve got several gold buying opportunities. The easiest way to gain exposure to the yellow metal is through gold mining stocks, gold ETFs, and gold certificates. 

Gold Mining Stocks

The first thing you need to understand about gold mining stocks is that you’re essentially investing in a single company.

In other words, the price of gold does not reflect the price of your gold mining stock. Gold could rise or fall without affecting your stock.

So, if the company you invest in goes down, only your stock would be affected. Always research companies before investing. 

Gold ETFs

A gold exchange-traded fund (ETF) is specific to companies that mine for gold. Just like any other ETF, gold ETFs can be bought and sold on an exchange.

If you’re looking to curb risks, ETFs could be the option for you. A gold ETF will help you spread out some risk along with the market because you’re not invested in one company but several.

This doesn’t make gold ETFs bulletproof, however.

ETFs are subject to market fluctuations because they are linked to financial markets. 

Gold Certificates

At one time, gold certificates were a very popular form of gold investment.

However, once the US dollar was no longer backed by gold, the viability of gold certificates fell off a cliff.

Gold certificates are not technically stocks, they’re official papers stating your gold ownership. But instead of owning physical gold, your certificate is tied to a company. The health of that company can ultimately determine where your certificate has any value.   

Learn how to invest in Gold with confidence

Before the gold market rebound happens make sure you’re fully prepared. One of the best ways to stay ahead of the game is to join other retail investors at Dear Retail. We present our community with knowledge, analysis, and investment strategies to help them make a profit. Whether it’s a discussion about the gold market or the small-cap market, we’re your go-to resource. Join Dear Retail investors. Become a smarter investor.

Anderson Patterson | Anderson is a video editor and developer who believes in the power of visual organization. He recently graduated from the University of Washington, where he concentrated on post-production during his studies. He was first exposed to the mystical world of visual art creation while watching his father edit advertisements when he was a child, and he has been working towards his dream of becoming a video editor ever since.

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