IF YOU WAIT, YOU MAY BE TOO LATE

Gold is on fire. With so much uncertainty in the economy, the stock market started going down in July 2011 and gold started going up. That is why so many people consider gold an insurance policy: when things get bad, gold usually goes up.

During gold's rapid accent in the last 10 years it might have been hard to get on board if you were looking for a good entry point. Only 2008 saw any length of time where the price went down for an extended period. All other years it has seed a steady rise up.

Somewhere in the middle of 2011 I told myself that if gold went down below $1500 I would buy some. It might have gone down briefly below that amount but if it did, I missed it. And now the current price of gold sits at almost $1,900 with $2,000 surely not far behind.

What should I do now? I'm sure I'm not the only one asking that question. Can gold continue to keep going up making all time highs? And if I were to buy gold, how should I buy it: gold coins, gold bars, gold ETF's, gold mining stocks?

I used to think that gold mining stocks mirrored gold's movement but I was very wrong. I have some shares of Kirnross Gold Co. (KGC) but that has gone nowhere for the last 5 years. I won't be buying any more gold mining stocks as I have proven to myself that they are not the same as buying gold.

I have a few gold coins but I don't want to deal with the added hassle so that means this time I will give a gold ETF a try. That is, when the cost of gold goes back down a bit to at least under $1,700. Which it probably won't do. Which will mean that I miss out again.

Photo from GoldPrice.org

GOLD $1,500 PSYCHOLOGICAL BARRIER

There are psychological barriers in stocks and metals and we might be seeing one right now with gold. If you look at the chart below you will see that gold had a tough time trying to get over the $1,000 mark and briefly touched it (or almost touched it) 4 times before breaking through on the 5th try. Will we see the same thing at the $1,500 level?

From the time gold first reached $1,000, it took a little over 2 years to bust through and go higher. From that point it has been a pretty steady ascent to the current price of gold at the $1,500 mark but now it seems like it could be stalled there for awhile. Of course, it could even go down from here but as long as the dollar continues to perform so poorly, it seems that gold will at least hold steady.

The $1,500 psychological gold barrier is just that: it is all in people's heads. There is really nothing different between gold being priced at that amount or any other amount. But it seems to be human nature to put an extra emphasis on nice round numbers and give them more significance than they deserve.

Whenever the stock market or gold reaches a "milestone" number, there is extra news coverage and more people become aware that it is happening. However, these numbers like 1,000 and 1,500 for gold and 10,000 for stocks don't necessarily mean more buyers come on board. Much the opposite, the publicity probably spurs more selling than buying as people decide to get out at the top. This makes breaking through these barriers that much more difficult.

WHEN YOU TAKE AWAY THE DEMAND, GOLD IS WORTHLESS

What makes gold valuable and why do people want it? Can we eat it? Can we wear it? Can we build things with it? No, no, and no.

The only reasons gold is valuable are that there is a limited amount of it and people think it is pretty. They want it because they enjoy wearing jewelry that is made out of it and that is what 99% of gold is used for. The key is that people WANT gold but they don't NEED gold.

If people stopped wanting it, the cost of gold would plummet which is simple supply and demand. So, under what set of circumstances could we have a situation where people stopped wanting it?

We saw a glimpse of one last month with the earthquake in Japan. Entire towns were swept away and anyone who lived had nothing. They needed shelter, food, clothing, water, and all the other basic minimums of life that were destroyed in the earthquake. They needed blankets and food....not gold. Do you think anyone standing there in those deserted shells of towns could have gotten anything for a bar of gold? Probably not.

Now you might say that anyone who had gold either on them, in the bank, or in gold stocks could have gotten out of that devastated area and travelled back to civilization and started their life over. If you have money (which gold still is) you have a better chance of starting over. But the key there is that they needed to get back to CIVILIZATION where everything was normal (or mostly normal). Back in civilization people still WANT gold.

People don't NEED gold and they never will to live and survive. So if we ever get to the point in the world where we are all just fighting to stay alive, gold will be absolutely worthless because there will be no demand for it. Water, food, clothes, and shelter will be worth more than gold and those things would be hoarded and traded. That is pretty much an Armageddon scenario I am talking about but it illustrates that if you take the demand for gold away, how it is really worth nothing at all.