December 16, 2010
The first rule of investing, the sine qua non, is to buy low and sell high. One might even refer to it as the "Golden Rule" of investing. The irony is that gold is priced very high. Moreover, on the few occasions I watch television, I see commercials selling gold. To me, this is a tell-tale sign of a mania reminiscent of the great housing bubble era.
The common knowledge is that gold is priced so high because of the falling value of the U.S. dollar. It makes sense that if a commodity is priced in U.S. dollars, and the value of the dollar declines, it will take more to purchase an equivalent amount of that commodity. However, there are many influences on the demand of the U.S. dollar. One of the most important influences is interest rates. We are in and have been in an environment where interest rate levels are near all-time lows. As economic growth accelerates and confidence in the future becomes more prevalent, interest rates are going to rise. In fact, they have already begun to rise.
A natural effect of rising interest rates is more demand for U.S. dollars as international investors seek relatively higher interest payments on their deposits. This increased demand will likely cause the dollar to strengthen, and the price of gold to fall.
The moral of the story is to not get caught in yesterday's trade. The further along in the economic recovery we are, and the higher the price of gold gets, the more difficult it will be to earn positive returns and negative returns become more likely. In other words, don't ignore the golden rule of investing by buying high (and selling low).
Brennan R Redmond
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).