Bargain-hunting for Bullion: why I started nibbling nuggets last week

For beleaguered British investors, bullion has not been the safe haven most expected. The combination of a declining bullion price has been exacerbated by a rare rally in Sterling. The slash and burn in public spending has provided a fillip for the Pound during what may prove to be a honeymoon period with the City. Warren Buffett’s view on buying stocks should be the opposite for gold investors, namely sell when there’s fear and buy when there’s complacency. As ever, buying any asset is subject to emotional uncertainty and wrangling; applying as much to equities as it does to foreign exchange. Behavioural Finance is insightful and has much to say on the topic. Nevertheless, the choices boil down to this: Existing investors - should I stay or should I go? Pending Investors - shall I buy or shall I wait?

The way I overcome the fear and stress of being in or out of the market is to layer investment on the way in and on the way out. It’s a very simple process and here’s my thinking for recent price activity. You will notice below how gold prices tend to move within a range of volatility known as Bollinger Bands. Prices crawl up and down the bands and don’t spend a great deal of time in the middle. We see recently how gold hit the mid-point of this range. While there are detailed technical clues on which way the price is likely to move, for most investors it is too time consuming to follow and better left to option traders.

For simple-minded souls like me these mid-points are a good place to establish a gold position. I had sold some gold too soon in the rally earlier this year and regretted my decision. Just as having too big a position can cause sleepless nights so too does too small a holding so I have added to the long list of life’s lessons on that score. I therefore bought a slug of the shiny stuff last week on the 19^th July. I wasn’t sure if the move would be up or down but this mid-point was an ideal entry point. My rationale was that it could rally in which case I would buy above £850. New highs are positive and are jumped on by hedge funds looking for a momentum trade. Likewise, if the volatility band was trending up then the price would likewise follow through.

However, if prics fell to the bottom of the band at £825 then I would get a better average price. Either way it is happy days unless of course we see a swoon in metals like we endured this time two years ago. My aim is to get an average price of £725 for the combined purchases but the main benefit was to take action and do something rather than sitting round getting frustrated. While I won’t be active in profit-taking I will be in a position to tamper at the fringes but keep the core holding until prices get silly. Much like the tech bubble, when you’re on a roll, you keep top slicing and halving positions as the climax of the market will likely see prices doubling again and again but that is still some years away.

 I will update you when I take the next nibble and will be sending out my first Mailshot to celebrate Guernsey Gold’s first birthday in business.

 Toby Birch 27^th July 2010