Investment herd: Baa Baa Gold Sheep

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The first day of March saw gold prices fall as much as $100 an ounce as markets watched Fed Chairman Ben Bernanke for signs that the US economy would print more Dollars. When his congress speech failed to mention any plans of further stimulus the eager Dollar bulls gleefully took this as a positive sign for the world’s largest economy.With the Dollar rising in value on hopes that no more Quantitative Easing is required, demand for Gold fell. Up until Thursday’s fall, the price of gold had continued to rise handsomely this year so some active market participants also recognised the opportunity to take their profits already accumulated by selling too.

Follow the herd?

It’s human nature to feel comfort in a group and follow the herd. Perhaps seeing what others do first and then follow suit. The sheep mentality. We see this all the time within the investment world, especially with gold. A majority of investors will feel comfort by seeing others buy gold and the gold price rise accordingly and then invest themselves. When the market falls, these very same investors consider selling themselves in a panic, or at the least, wouldn’t dream of bucking the trend and investing more.

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However, it is the wise investor who leads the market and breaks free from the flock. It is the more experienced customers we have who have re-invested in  gold at the new lower prices. Quite simply they know that the gold price is volatile, they have assessed the reasons for the price fall, judged that the global economy hasn’t healed overnight, and are very happy to exploit the latest price dip.

Be savvy and break the herd mentaility

Many market analysts will agree that the price plunge was larger than warranted, representing a great buying opportunity. Afterall, Bernanke’s speech failed to suggest any change in Fed policy since their last conference. They certainly haven’t ruled out QE3. From a micro perspective we are still seeing good buying of physical gold coins and bars, coupled with relatively tight supply streams. Premiums on coins have held up well but have retreated from the heights of the panic buying periods we’ve intermittantly experienced over the past few years.

My advice, is to break from the sheep mentality and take a step back from the day-to-day economic news and data. Medium to long term investment should be taken with that timeframe in mind. If you think the global economy has some way to go before recovering then surely it is better to buy gold in price dips with coin premiums low, rather than follow the  flock and buy when supply is at its tightest and prices and premiums are high.

Daniel Fisher

Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.

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