GOLD series: Part 2 – Is there move left in GOLD?

In the 1st part, we looked at the monetary system and the value of fiat currency vs gold. If one was convinced on the case for gold, the natural next step would be to invest.  However, before buying, one should ask two important questions which 99% of investors do not consider:

1) How much move is left on the table?
2) What is the trade management strategy?

Open equity

The value of gold is determined not by new output, but by the above-ground supply, which is 190,000 metric tonnes. The floating supply available for
day-to-day trading and investment is only a small fraction of the total supply. If demand was to go up by 47 times in a fairly short period of time and it was impossible to increase supply, what would be the likely impact on the gold price? According to basic economics of supply and demand, the price will rocket up. Some speculate that it will go up to around $11,000 (refer to reference video link below that explains this).

From its current price of about $1900, that is about 400%-900% gain or open equity left. Open equity basically refers to the amount of open profit left on the table.  At the point of maximum open profit reached, the upside is reduced and correction begins. So it is imperative as an investor, for you to know your open equity and your exit strategy. One well known investor seems to know his open equity.

Warren Buffet, owner of Berkshire Hathaway has bought $565 million worth of shares in the world’s largest gold miner, Barrick Gold. This is quite the turnaround for a man who has turned away from gold for decades. So what has made him have a change of heart? Furthermore, Buffett is a no short term trader, moving in and out of positions to make a quick buck. So he probably doesn’t see the price of gold coming down any time soon. Buffet is not the only investor getting in on the gold ride. Goldman Sachs is now recommending that its high net worth clients have some exposure to gold. Another investment legend, Ray Dalio, acquired $400 million of gold ETFs through his Bridgewater Associates hedge fund during the second quarter. The Federal Reserve’s chums at Black Rock weighed in as well, acquiring over 5 million shares in the silver ETF SLV.

These moves by the biggest names in the investment world could be the catalyst for two trends in the very near future:

  • The entry of significant institutional funds into the precious metals market
  • The signal to the man in the street that if Warren Buffet is doing it then I should be doing it too

In the whole of 2019 just over $32 billion was invested in gold bullion. If the world’s leading financial institutions such as fund managers and pension funds decided that just 1% of their assets under management should be shifted into gold, for example as a hedge against a weakening US dollar, that would require the purchase of $1.5 trillion of gold. That is more than a catalyst for gold prices to sky rocket up.

Trade Management

Once you have bought your position, you would have to anticipate your
moves in different scenarios that could occur.
Consider the following scenario:

What are you going to do when you have an open profit of
300% gain?

a) Are you going to sell it when it drops back to your original entry price?
b) Are you just going to do nothing till it gets to your predetermined exit
c) Are you going to sell it when it drops by half to capture at least 50% of the
d) Are you going to sell it when it drops by a certain amount that you have
predetermined and then re-enter when some buying pressure and
confidence re-enters the market?

There is no right or wrong answer to the above. Foreseeing the different scenarios and being prepared is pivotal to your success. The litmus test is to see if you are at peace with yourself at the point of exit with whichever decision you have made.

In summary, before you enter any position including considering buying gold as an investment, ask yourself how much open equity is left and what your trade management is. In the finale part of the gold series article, we will look at the different ways to capitalize on the gold rush. Till the next time, stay disciplined, follow your trading plan and keep trading like a Master.

Reference Links:

1. Elite Investors Club Article – The Sage of Omaha performs a U turn
2. by Mike Maloney –

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