Legendary businessman Steve Forbes once said, “Everyone is a disciplined, long-term investor until the market goes down.” It’s challenging to have the fortitude to hold on to investments during a one-day carnage event like last Thursday. Everywhere you looked there was red on the screen, as U.S. stocks lost 2.5%, commodity equities lost 3% and gold declined 5%. Gold stocks took one of the biggest blows, falling about 7.5%.
So what should an investor do after a day like Thursday? Stay calm and invest on, as I believe there is opportunity in picking up what the bears left behind. Here are a few ideas to ponder.
Gold fell below $1,300 on Thursday, and based on our oscillator data, the yellow metal is now in extremely oversold territory. On an annual basis, bullion is down 2.6 standard deviations, which is the worst reading over the past 10 years.
This is the opposite reading that gold buyers had in the summer of 2011, when it was up two standard deviations, or at the $1,900 level.
Last week, before this market event occurred, I said that gold could fall another 10%, but that there could be a 30% upside over the next 18 months. You can see the upside potential in the chart, as gold appears due for a reversal toward the mean.
However, short-term financial gold traders may be discouraged from acting on this bullish sign, as the yellow metal is now even more expensive to trade. After last Thursday’s huge sell-off, the CME Group, the largest operator of futures exchanges in the U.S., decided to raise margin requirements on gold. As of the close of trading on June 21, the minimum cash deposit for gold futures will increase 25% to $8,800 per 100-ounce contract.
This is the second increase in only three months. In April, the CME raised the initial gold margin requirement, which is what triggered the short-term liquidation out of financial gold ETFs and futures.
This isn’t a typical move for the CME. Usually, the firm raises margins when prices are rising rapidly to cool down speculation or lowers margin requirements in an attempt to boost liquidity.
In contrast, cash buying of gold is increasing, and this is good news for two reasons: 1) Retail gold investors are not leveraged like futures gold trader, and 2) their buying tends to be stickier.
As we have always suggested, it is prudent to have a 5% to 10% exposure and to view gold as a long-term investment. It’s important to rebalance annually or when the oscillator shows that gold has moved two standard deviations.