Given that everyone’s favorite metal is still hovering near its all-time high, you may think that it’s a bad time to buy gold bullion. And admittedly, you’re not going to get any bargain basement prices anytime soon. As I write this, gold is trading in the $1800 per ounce range.
Don’t let that fool you into thinking that you’re never going to be able to profit, though. Remember the trader’s motto: buy low and sell dear. You can do that if you’re ready to pounce when the stars, or at least the economic circumstances, align properly.
The Gold/Dollar Connection
Gold and the U.S. dollar (or any fiat currency, really) share an intricate and inverse relationship. If our money was still based on a gold standard (as it hasn’t been since the 1970s), there would be a direct relationship between gold and the dollar. But that isn’t the case.
You see, the dollar currently has no intrinsic value. It’s basically worth what the government says it is, and they depend on us to agree with them, which we generally do because it’s in our best interest to do so. But the government can print more dollars anytime it wants.
So every time the government adds to the money supply, every dollar out there is suddenly worth less. When the dollar weakens in this way, it takes more dollars to buy an ounce of gold, which does have an intrinsic value. This is, in part, what has driven the recent price increase for gold.
On the other hand, when the dollar strengthens, it takes fewer dollars to buy an ounce of gold… so gold prices go down. It’s worth your while, then, to purchase bullion whenever the dollar strengthens noticeably. Just wait for the gold price to drop, and strike while the iron is hot.
Crude Oil and Gold
Analysts have long noticed that when crude oil prices drop, gold prices tend to drop as well. The two commodities are not in lockstep, however; there have been occasions when one or the other dropped and the other did not. But it’s still a good rough-and-ready indicator for a downward spike in gold prices.
As you may have noticed, gas prices have been higher in 2011 than they’ve been in several years, since they peaked at over $5 a gallon. Gold prices have been right up there, too. And recently, whenever gas has started to get a bit cheaper, so has gold.
This tandem drop may just represent general market forces, in which most high-ticket commodities dropped in price simultaneously. But it’s worth noting. As you’re driving around looking for cheap gas, keep an eye out for any nose-diving prices, and be prepared for gold to drop so that you can buy on the spot.
Both is Better
In the first week of July 2011, we saw both a stronger dollar and lower crude prices, which offered a nice twofer that put gold prices down around the $1510 level. If you purchased gold then, you were probably crowing by the beginning of the next week, as prices spiked at over $1550 — a nice little profit.
This could happen again without warning, so keep an eye out for weak crude oil prices and a stronger dollar, occurring both separately and together… and be poised to move instantly.
You may be able to wrangle a pretty good deal if you buy gold bullion at just the right time, as others start to liquidate — and with gold being as precious as it is, it won’t be long before you profit.