It’s always interesting to see how different market participants react to price movements, as every investment strategy has different goals based on various factors, including time horizon and risk profile.
The volatility in gold bullion is an excellent example of the variety by market participants in their investment strategy. For most of the summer, I said that the selling pressure in gold bullion would continue until the short-term investors completed their liquidation.
It appears that most of the selling by these short-term investors has subsided. However, during these months we have seen the investment strategy by very long-term investors, especially in China and India among other Asian nations, continuing to accumulate gold bullion.
This is what investors need to consider: that globally, the actions of different economies and different market segments can have a huge impact on one’s investment strategy—especially when it comes to gold. Just consider the following factors.
For businesses involved in physical gold bullion, their investment strategy over the past two months has been to continue accumulating the commodity. Thailand’s biggest domestic gold bullion importer, YLG Bullion International Co., recently stated that it expects to double its purchases of gold bullion. (Source: “Thai Gold Buyer Doubles Imports After Bear Slump,” Bloomberg, September 24, 2013.)
According to the CEO, the company expects to import 200 metric tons of gold bullion in 2013, up from 92 tons of gold bullion in 2012. This is a company that knows its clients well, and has adjusted its investment strategy to incorporate lower-priced gold bullion for higher revenue, as demand from end consumers increases.
But you have to remember, the circumstances among one’s investment strategy for gold bullion can vary greatly from country to country. Many of these nations, especially India, continue to see their currency drop dramatically. In this instance, a hard asset such as gold bullion is preferable to their local currency.
While we here in America might complain about inflation, we haven’t seen anything compared to other parts of the world. Since 2007, the price of Iran’s national bread has essentially doubled in price, the price of milk is up over 400%, and the price of beef is up over 560%. (Source: “Iran in Numbers,” BBC, June 7, 2013, accessed June 26, 2013.)
In Iran, many citizens there buy a car as soon as they can, because a vehicle is actually an asset that is increasing in value. When was the last time you bought a car and it doubled in price over a few years? That’s real inflation, and that’s the reason why many of these citizens in other nations continue to have an investment strategy that includes gold bullion—as a hedge against inflation.
As long as instability and the lack of ability to run their country effectively (including corruption) remains with governments around the world, people will continue to utilize an investment strategy that includes gold bullion. However, the ebb of flow of supply and demand in this commodity depends largely on the investment strategy that best suits the needs of each country’s citizens.
Likewise, the key to being successful in your investment strategy, regardless if we’re talking about gold bullion or any other asset, is to know what your edge is and your goals.
If you’re a long-term investor in gold bullion, short-term fluctuations can be positive for your investment strategy as this allows a lower-priced entry point. However, you must remember that with a commodity like gold bullion, actions and events in the global economy—not just the state of the U.S. economy—can have a real impact on your investment strategy and the gold market in general.