Should you buy now?

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Is the market ‘high’ or is it ‘low’? Is it ‘time to re-enter the market’ or should you be buying cans of baked beans, a shovel and a gun?

To buy or not to buy- that is the question for investors!

Every day there is someone telling us something different. How do we make sense of it all?

This site sticks with the Great Disclaimer – nothing here can be considered personal advice, so the title is more correctly referred to as a ‘rhetorical question’ that doesn’t have an answer you can just read on a website. The funny (well, it would be if there was any aspect of money that was funny) point to all of this is that my Inbox continues to be bombarded with emails, offers and solicitations that tell me they’ve the information i need to ‘Stop you being blindsided by the shock that’s coming’. There are any number of websites and email newsletters that told us all to sell everything and move all assets to cash last year. No suggestion yet that this should change – but along the way, here’s some information to help you speculate in bonds, penny dreadful shares, trading strategies and WhatHaveYou. All of this is so easy to do if you have no legacy advice to deal with. Financial planners know this because that is the world they live in. Their past recommendations are on display, so they are always a little reticent about spruiking this or participating in the latest fad. It may be that some past recommendations were solidly based on heavy research, market performance and peer analysis – but then managed to utterly fail. Or the investments that are ‘locked up’ while the various managers try to work through tightening bank covenants, inflexible markets and a dearth of buyers. A financial planner does not have the luxury 0f being able to ignore anything said last year or last week. So the issue of whether or not to buy is always one laden with many, many inputs. So let’s just try for a moment, to cast aside the shackles of did / did not, or what has happened yesterday – and try to look at the world afresh.

Is there a time to buy?

Perhaps one of the most interesting ways of considering whether or not any time is better or worse to be buying, is to ignore all of the disclaimer material correctly appended to every piece of market history – and to see just what would have happened if we had acted this way or that way in the past. This is in complete contrast to the legislatively correct disclaimers that state you should not use past performance as a basis for estimating future returns (or words to that effect). However, the past is often all you have to use as a basis for gaining an understanding of how investments work. After all, the past was once the future, and for at least a little while it was right now, so what applied then could quite possibly still apply now. You can’t rely on it but it can be particularly handy when you are trying to comprehend difficult concepts and ideas.

Today i’m going to pick on gold. Why gold? We’ll look at gold because it is the Hottie of the moment. Gloom and doom analysts all over the world are suggesting that the currency debasement that occurs whenever printing money is tried (“Quantitative Easing” or any of the other quaint names for the actions of central bankers in the USA, UK, Japan and Europe) can only lead to disaster – and the one tried and true alternative that always comes up is GOLD! We are constantly asked to ignore the fact that gold supply in traditional markets (jewellery, electronics, industry) exceeds demand, and to pretend that the massive increase in gold speculation is not speculation at all but the start of a move back to the ol’ gold standard (where all money was backed by physical gold). Gold has acted as a strong counter-investment in hard times. In financial planner talk, it is ‘negatively correlated’ to traditional share and property markets. When things go bad – buy gold and hide it in a safe. That’s about the way the story goes.

So let’s look at the Australian price of gold, and consider a few simple ideas about price and timing.

Price of the ASX listed GOLD security

Not many charts have been pointing in this direction over the past years

That chart sets out the price of a listed security that reflects the price of physical gold. You can see the spikes upwards that match with periods of greater market stress – such as the Lehman Brothers’ failure, the depths of the Global Financial Crisis, and the worst (so far) of the Great European Talk-fest Debacle. The price of gold has shown a strong resilience to these awful and destabilising events. Anything that was worth (say) $8,000 in 2007 and has managed to increase to $15,000 today is showing a pretty impressive performance.

What else do you notice about the price of the GOLD security? See if you can pick what i’m going to conclude out of all this chart nonsense…

Now we will look at the price of GOLD compared to the price of an investment in the top 200 companies listed on the Australian Stock Exchange, as measured by the S&P/ASX 200 Accumulation Index. I’m using the accumulation index, as any investment in those 200 companies is going to generate an income – which won’t happen with most gold investments, as gold is a physical asset that costs money to keep rather than earning an income along the way.

Gold vs XJOAI to 18th July 2012

That folks, is what we call ‘negatively correlated’ (well, mathematically more so than not)

Notice something about the correlation of the two? Firstly, it’s pretty obvious that the top 200 companies have been having a pretty awkward time of it these last five or so years. There’s been a good recovery from the depths of the GFC but the overall level is still lower. Especially when we contrast that performance with the rise and rise of the GOLD price.

However, the one thing that never really gets talked about when folks yell “sell! sell! sell it all and buy gold!” is the ‘herd’ effect of all that selling everything else and buying gold. If you look back at those charts to the depths of 2009, you can see that the price you paid for your gold in January 2009 was about what the price is now.  If you look at the price you paid when the Great European Talk-fest Debacle entered its giddy heights then you’ve clearly lost a bit of money right now.

If you look at the top 200 companies index prices at these times, you would notice that they are hitting spiraling low points. You would also notice that these market prices quickly recovered from these depths.

So if there was anything to take from this quick (academically deficient, subjectively timed and amateurishly contrasted) piece of data, it would be that the best time to buy those alternative ‘hedging’ investments (of which gold is just one) would be when everything is motoring along just fine and dandy. And to sell those same investments when the world seems to be at its subjective economic worst. Similarly, it would seem that those times of fear and terror and disdain for any future growth, make a reasonable time to be buying up a little bit of the larger companies, as the market is possibly pricing in the worst outcomes (which may still come to pass but often are just fodder for the daily news machines).

That old “buy low, sell high” statement is flawed in so many ways – but by listening carefully to all that marvelous fear-mongering you may just be able to spot a time when perhaps the market isn’t acting quite as efficiently as the academics would have us believe it ‘always’ does.

REMEMBER : Gold may be cheap and gold may be expensive. The GOLD security may be a great place for money or it may be just plain awful. I have no idea. Markets may be poised on the cusp of a generational lift or hovering at the edge of the abyss – i have no more idea on that than the average internet marketing fraudster peddling their wares out there. Again, this is not personal advice. It’s not really even ‘general advice’.

i’m just pointing to a few things and asking that you look closely too. Ponder the concepts and see if there is anything to be learned about the news cycle, the economic cycle, and investor buying impulses. There’s a lot to be learned by keeping your eyes and ears open in times such as these. At the least, there are a lot of great stories for when the markets enter a bull phase again, and everyone’s recollections of a post-GFC world fade into a vague and distant memory.

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