Thursday, 26 January 2012

Pain and confusion for gold doubters like me

As far as I can tell there are two ways of dealing with confusion. One is to do nothing except wait and watch and hope that some kind of decision or useful act emerges from my brain. The other is to do something, anything, and hope it provokes some similar kind of clarity.

I tried the latter one - the acting - back in December and sold everything. Then I decided to switch back into the second one - the waiting - and do nothing. Unfortunately I think I made that switch when the opportunities presented by having cash had just appeared (gold around $1,550 per ounce)... but I didn't take the opportunity, not because I was unsure, but because I switched back into a waiting.

If I've interpreted my mental state right, the switch from acting to waiting took place subconsciously.

Now I'm aware that I'm in waiting mode I think I better learn from my earlier mistake and not move back into acting without properly examining the whys and, more importantly the whens.

As discussed in previous posts I still don't know what I'm doing - or what my motivations have been for doing what I've done so far. That uncertainty exists in equal measure in my personal financial situation (I don't know if I can afford to do this) as well as the gold market itself (I don't understand how it works).

So what is the motivation then? Well, rather than writing it off as some stupid ill-thought-out exercise that has cost me £250 I need to think of the positives. Like for example I am reading Marx and I understand better how currencies work on investments and I think I am working out how to make decisions.

However, all of this is clouded when things happen like they did today - the investment that I don't own, PHAU (ETF Securities Physical Gold exchange traded fund), gained more than 3% after the Federal Open Markets Committee (FOMC) statement said that US interest rates would stay low til the end of 2014.

But does that really explain this move? Michael Hewson at CMC markets said the tone was only slightly more dovish than had been expected. So was it a flash in the pan? Well not according to Scott Redler, chief strategic office at, who told the Street that the rally happened on strong volume, which is bullish for gold despite the fact that much of it came from short covering. "A big move on heavy volume through a downtrend is bullish." Redler is now looking for higher prices in gold (but over what period - he was one of the guys talking about gold at $1,400 when gold fell sharply in December. I need to get my head around how views like his - and mine - have to change as the market changes).

Low interest rates means that the cost of owning gold falls (in comparison to holding cash). And some commentators* say that, low interest rates are naturally inflationary (I'm thinking because more money is floating about the system pushing up prices - which encourages people to exchange stuff and boost the economy).

*Phil Streible, senior commodities broker at RJO Futures told The Street: "Inflation will be created ... [the Fed is] artificially creating inflation for the next couple of years."

Low interest rates, higher inflation, are both good for gold, not so good for someone who doesn't own gold.

But I'm in waiting mode. Everyone expects gold to be volatile in the first half of 2012, may be that means it wont be. However I'm holding out for lower prices at some point and hopefully working out more about gold during that wait.

If I bought today I'd get 10 PHAU shares for $1,086.79 after adding £11.95 trading costs

How does that compare to previous buying and selling? Between 22 September 2011 and 16 December I paid £3,058 for 28 PHAU shares with purchases on three different occasions:

On 12 December 2011 I bought 10 shares for £104.58 each - £1,057.74 in total (after fees).

On 4 November 2012 I bought 10 shares for £108.01 each - £1,092.10 in total (after fees).

On  September 22 I bought 8 shares for £111.98 each -  £907.78 in total (after fees).

On 13 January I was thinking about buying 10 gold shares for £1,062.52 in total (after fees) which is not much worse than my current best buying rate on 12 December. 

But I'm hanging on. If I'm making a mistake at least I'll know it at some point.