Sasha Cekerevac: The key to a great investment opportunity is to get in before everyone else. As most readers who follow the markets know, the results of the latest Federal Reserve meeting were quite a surprise, as the central bank determined that now was not the time to reduce its asset purchase program.
That news was a green light for people to pile into the markets. Gold bullion made its largest jump in over a year. However, those people who were waiting for the right investment opportunity to get into gold bullion should have been looking for a better risk-to-reward entry-point earlier in the year.
Back in early July, when gold bullion was being heavily sold, I told my readers that the price at that point was quite attractive. (See “Investing in Gold Bullion Is All About Timing—Here’s How to Do It Right.”) While there certainly is potential for a long-term investment opportunity in gold bullion, one has to be careful to not blindly chase a market.
Looking at the physical demand for gold, people in countries such as India still see an investment opportunity over the long term. Just recently, the Indian government once again raised taxes to try to curb imports—and limit demand for the precious metal. This time, the Indian government increased the import duty on gold jewelry from 10% to 15%. The import duty on gold bullion itself still remains at 10%. (Source: “India raises import duty on gold jewelry to 15 pct,” Reuters, September 17, 2013.)
India is experiencing severe problems due to capital outflow, as citizens there sell their currency, the rupee, to buy gold. This is creating a weakness in the rupee versus the U.S. dollar, driving up inflation. This situation is similar to a snowball effect: as the currency weakens further, it creates higher inflation, which lowers the wealth of the people, who then sell the currency even more to buy gold bullion, and the cycle continues to worsen.
Clearly, the investment opportunity in gold bullion for citizens in nations such as India is quite different than what we are experiencing in America. However, while the U.S. dollar still remains the world’s reserve currency, if we continue to simply run easy monetary policy without real structural reforms in our fiscal policy, there could be severe problems in the long term.
When I recommended readers consider buying gold bullion back in early July, it was a great investment opportunity. My analysis was built on the flow of funds. At that point, selling pressure was extreme, and people were panicking to get out.