Twenty years ago, I cut my teeth in the markets by trading gold.
It was a good time to develop an interest in the yellow metal. It had been trending lower for decades, and sentiment was awful. The Bank of England liquidated most of its position between 1999 and 2002. No one seemed to want the “barbaric relic” anymore.
It was the ideal undervalued asset.
All gold needed was a catalyst to spur the return of investor interest. This came after the tech bubble burst, when the Federal Reserve held interest rates down. Gold took off.
It didn’t rise in a straight manner, and there was plenty of volatility along the way. Even so, the price posted 10 consecutive years of positive returns.
As a commodity, gold tends to swing around a lot. Official inflation figures avoid including commodities because prices are so volatile.
There are two primary ways to make money from commodities. You can either buy and hold, so you ignore the volatility, or you have to be willing to buy when they’re weak.
The easiest way to lose money is to chase them higher. That’s when volatility can become your enemy. Buying too high leaves traders very exposed to drawdowns.
Let’s think about those two moneymaking buying strategies.
If you buy and hold, you need faith. There has to be a clear narrative for why someone should hold through thick and thin. You need to believe in it.
The good thing about adopting a buy-and-hold strategy is you’ll enjoy the whole bull market. Unwavering loyalty to the bull market means you’ll ride the bull for as long as it lasts.
The challenge arises when it comes time to sell. It’s very difficult to identify the difference between a correction in an ongoing bull market and a top.
Sitting through a pullback without selling is hard. If prices rebound, you’ll feel good about the decision. And you’ll feel better about holding during the next correction. The more corrections investors endure, the less likely they are to want to sell. Buy and hold works so well that it conditions us to never exit the position.
Every trend eventually ends. But big bull markets last much longer than people believe is possible. Anyone who follows a buy-and-hold strategy needs to come up with a way to decide when enough is enough.
Volatile instruments tend to follow sawtooth profiles. That means they go up a lot in a short period of time. They can also pull back violently. Provided the trend is still in place, the general direction of trade will be upwards.
Occasional downdrafts are surprising but inevitable. It makes sense to consider those occasions as attractive buying opportunities.
Buying the dips is one of the best ways to buy in any bull market. You need a strong stomach, though. Investors are always wary the downdraft will persist. An uptrend rewards the fortitude to purchase anyway with higher prices.
So why is this relevant? The Federal Reserve is doing the same thing now as it did after the tech bubble and the 2008 global financial crisis. The Fed will refuse to raise rates until inflation returns. That means it is intentionally devaluing the dollar. This is exactly the kind of scenario that is best for gold.
It won’t always rise in a straight line, and it’ll have some steep declines. However, gold will reward investors who know how to trade volatile instruments.
All the best,