It's a fact; no market goes straight up or straight down. But what about gold? Will it rise to $5,000 an ounce?
Perhaps. But it won't happen overnight and there will be times to buy it on the way up.
And when will those times be?
The answer is simple: When the price of gold reverts back to the mean on a longer term investing time frame.
That's where I'm making my next major buy point of gold. That's the price level I'm waiting for. And it's found on the weekly chart.
Okay, at this point you are probably thinking, "If it were that easy, why isn't everybody doing this?"
Alas, a lot of people have tried.
The concept of "Reversion to the Mean" is not original by any stretch of the imagination. There are two things that I've seen that throw traders for a loop on this setup. The first is the temptation to take profits too soon.
How is taking profits bad?
They get excited about a too small of a profit. They take it, thinking they can buy back in at a later date. But then something unusual happens. The market continues higher!
Said traders panic about missing the move. They watch it run away without them. And instead of standing aside and chalking it up as a bad trade . . . they dive right back in.
This "emotional trade" is typically a bad one, getting them in right at an intermediate top of a move. They then have to spend time watching this market move against them. A profit and loss than glows red every day as the negative numbers get bigger and bigger.
This throws them off stride, dominates their thoughts, ruins their confidence, and hurts their bank account. What turns out to be a normal pullback, a reversion to the mean, turns into a loss for the trader who picked up the position at the wrong time.
All because the trader listened to his/her emotions.
The trader who sells too soon, panics and buys back in too late, then panics again and sells too soon, suffers big losses. It's a vicious, yet common, cycle of trading.
For most investors, reverting to the mean is a simple calculation. Place a 65 day moving average on a weekly chart. This provides the longer term "average price" and also represents the ideal price to get into a prevailing trend. In fact, any market that is trading above this price is considered to be in a long term bull market. And any market trading below this price is considered to be in a bear market.
Gold looked good at $1,800 an ounce?
Well, be patient. On the weekly chart, the 65 period moving average is sitting at $1,491.00 an ounce. That is still well below where we are trading now, even with the recent weakness we have seen in the yellow metal.
Anyone who panicked and bought the top of the gold move is going to have to sit through a continued decline back to the mean. Most of them won't last. If they bought bullion, sure, they can withstand the price tempest. But if they bought leveraged instruments such as futures or options, well, they are just plain out of luck.
Leverage has to be timed properly to work. Longer term traders and investors who are aware of this simply tapped into the greatest strength a trader can have . . . patience. Patience equals good timing; and good timing equals superior investment returns.
My plan is to buy the GLD ETF, as well as in the money call options on GLD, some gold futures contracts, and some gold bullion on a pullback to the $1,500.00 level, which is just above the "mean price" at $1,491.00.
At this level, many traders who got in at $1,800.00 will be panicking and throwing in the towel. They won't be able to take the pain of their "paper losses" any longer. This frustration-selling will add the necessary fuel to the fire that causes market to revert back to their "average price."
This situation always repeats itself, and it will never change.
Because history always repeats itself; and whatís the primary ingredient in history?
In a nutshell, successful investing requires patience; patience to wait for a reversion to the mean.
Patience to overcome the blinding urge to chase a move if it takes off without you.
Patience to wait for the right price no matter how many articles you've read in the financial press stating the collapse of, in this case, the US Dollar.
Gold is a great market in which to invest, but it will not go straight up. Be patient for the move back to $1,500; and when it gets there, take your position, sit back, and wait a few years.
About the author:
John Carter's father was a Morgan Stanley stock broker. One day during high school, John came home from the mall where he was working at a store making cookies. He had saved up $1000 over the course of... Read Full Bio Ľ