Gold Rebound to Last?
Since we're on the subject of price drops (see yesterday's post), let's look at gold. It's been rebounding lately, and I'm sure there are some out there who see this as a reversal of gold's big correction, perhaps signaling a return of gold to its bull market glory days.
First of all, let's look at the correcting itself. April's dramatic drop of over $300 per ounce in the price of gold caught a lot of us off guard, simply because of the swiftness of the fall in such a short period of time. But if we look back to gold's high closing price on August 22, 2011, we see that gold has been in a steady downward trend since that time.
We'll use the GLD (gold ETF) as a proxy for the price of gold, just for the convenience of grabbing some data. (GLD has so far reflected the actual price of gold pretty accurately.) The numbers look like this: 8/22/2011 high = 184.59; yesterday's close = 129. So since the high of August 22nd, gold has fallen slightly more than 30%. Now that (compared to yesterday's numbers regarding stocks and bonds) is a much more serious fall.
First of all, it extends over a period of two years. The fall in stocks has taken place in a matter of weeks. The fall in bond prices has been a longer trend, but not two years worth. So right off the bat, the fall in the gold price is something that's worthy of consideration.
Second, now that we recognize that we're dealing with a fall in price that's worthy of attention, we must ask whether this price drop signals what many believe is a reversal of the gold bull market that began in 2001. It's possible. But to assess this properly, you must take into consideration the fact that a correction of 50% in a long-term bull market is not unheard of. And so this drop in price could be just that - a correction in an ongoing bull market that will resume at some point.
The take away to all this is that you can't focus too much on near-term trends and extrapolate out too far. Also, when you have a longer trend, you should see that trend in the context of an even bigger or wider perspective.
Frankly, I don't think we can know with certainty - or even near-certainty - which way prices will go for any item or asset class. And so balance becomes the important element in investing, no matter what the current market conditions. Not that you would never re-balance from time to time. But in re-balancing, you should make sure you're not simply reacting to price movements that could turn right around again. Your rebalancing discipline should be something you've thought through - and not in the heat of the moment as prices are either dropping or rising.
First of all, let's look at the correcting itself. April's dramatic drop of over $300 per ounce in the price of gold caught a lot of us off guard, simply because of the swiftness of the fall in such a short period of time. But if we look back to gold's high closing price on August 22, 2011, we see that gold has been in a steady downward trend since that time.
We'll use the GLD (gold ETF) as a proxy for the price of gold, just for the convenience of grabbing some data. (GLD has so far reflected the actual price of gold pretty accurately.) The numbers look like this: 8/22/2011 high = 184.59; yesterday's close = 129. So since the high of August 22nd, gold has fallen slightly more than 30%. Now that (compared to yesterday's numbers regarding stocks and bonds) is a much more serious fall.
First of all, it extends over a period of two years. The fall in stocks has taken place in a matter of weeks. The fall in bond prices has been a longer trend, but not two years worth. So right off the bat, the fall in the gold price is something that's worthy of consideration.
Second, now that we recognize that we're dealing with a fall in price that's worthy of attention, we must ask whether this price drop signals what many believe is a reversal of the gold bull market that began in 2001. It's possible. But to assess this properly, you must take into consideration the fact that a correction of 50% in a long-term bull market is not unheard of. And so this drop in price could be just that - a correction in an ongoing bull market that will resume at some point.
The take away to all this is that you can't focus too much on near-term trends and extrapolate out too far. Also, when you have a longer trend, you should see that trend in the context of an even bigger or wider perspective.
Frankly, I don't think we can know with certainty - or even near-certainty - which way prices will go for any item or asset class. And so balance becomes the important element in investing, no matter what the current market conditions. Not that you would never re-balance from time to time. But in re-balancing, you should make sure you're not simply reacting to price movements that could turn right around again. Your rebalancing discipline should be something you've thought through - and not in the heat of the moment as prices are either dropping or rising.
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