Last Updated on October 15, 2024
[Disclaimer: I own physical gold, physical silver, gold stocks and silver stocks. This is not investment advice and is provided for information only. This considers the economic case for gold and is not a recommendation to buy. Do your own research and consult a financial advisor.]
2011 was the peak of a gold bull market that began in 2000 or a mid cycle top in a longer secular bull market, depending on which way you look at it.
Gold bottomed at a price of $253 in 1999 and peaked at a price of $1920 in 2011.
It wasn’t until 2007 when I first discovered the investment thesis for gold.
I remember it well. I was at university and had just bought my first laptop. I would sit in the living room, reading vociferously while my roommates watched WWE.
I was reading what prominent gold bugs had to say highlighting the economic problems and the wise decision to position oneself in gold, which would allow for the preservation of wealth in future crises. As most of New Zealand seemed to fall in love with Barack Obama, I discovered Ron Paul.
The gold thesis made perfect sense to me, and I wanted to buy. The only minor problem, as a university student, I had no wealth to preserve. So I didn’t enter the market.
In hindsight, I should have worked more, hustled harder and been more frugal. If I had wanted it badly enough I could have found a way to put some money into precious metals.
2007 proved itself to be a very good entry point and I would have done well over the next few years.
Instead, I ended up first buying gold at a terrible time. It was August 23th 2011 and precious metals prices had risen a lot since 2007.
I had graduated, got my first job, paid off my short term debt and built up a buffer of savings.
Many were predicting a further increase due to the money printing which started in the wake of the Global Financial Crisis.
I felt pressure to buy, and buy quickly, and as a newbie investor I got sucked in by the mania (a good lesson in the psychology of markets).
I basically bought the 2011 peak as gold prices hit all time highs less than two weeks later on September 5th.
Although it was a modest sum, at the time it was a significant amount of money for me. The long term investment thesis for gold and silver had not changed, but I got my timing very, very wrong. However, I’m grateful for the good lesson it taught me about the psychology of markets.
In hindsight I should have bought stocks instead. They were only just recovering their 2007 highs and would go on a massive bull run over the 2010s.
As the price of precious metals declined for the next three years, I learned an excellent lesson in not paying too much for an asset, even if you believe in its fundamental value. While at the time I was frustrated, I’m now very grateful for the experience.
That mistake taught me so much and set me up for future success.
I never sold that gold I bought in 2011. Instead, I dollar cost averaged into a long term position between 2014 and 2018, alongside other investments in cryptocurrency, silver and stocks.
And since I was buying in gold NZD and not USD, I’ve been decently in the money for quite a few years now.
Here are 8 lessons I learned from the 2011 gold bull market.
1. Hustle To Buy When Prices Are Low
This is something I first learned in the 2011 gold bull and have subsequently learned during every crypto winter since I first bought Bitcoin.
Do everything you can to stack as hard as you can when prices are low.
I kick myself for not buying gold in 2007 when I first came to understand it. I didn’t have any money but I could have found a way to hustle and get some.
2. You Can Have The Right Thesis But Buy At The Wrong Time
This is something particular dangerous for hard money people, especially when you first learn about sound money and fiat currency debasement.
You can have the right thesis but get your timing very wrong.
There is a temptation to go and convert all your fiat to gold, silver and Bitcoin right away without much consideration of price.
But there is no point in doing so if it means you are buying the top and are going to be underwater in fiat terms for the next few years.
You might as well wait for better prices. Picking the top is hard to do but you should educate yourself in technical analysis and the psychology of the markets to avoid buying the top.
3. Technical Analysis Matters
When I first learned about gold, stocks and Bitcoin I only cared for fundamentals.
I bought into the argument that technical analysis was a bit of voodoo for short term traders.
But I was wrong. Even if you are a long term investor technical analysis matters. You need to be able to identify basic chart patterns and have basic knowledge of indicators such as moving averages and the RSI.
That way you have a better ability to identity long and medium term tops and bottoms.
Had I understood some TA, I might have been able to avoid buying the top as there were some technical signs for those who knew what to look for.
4. Market Psychology Matters
In the 2011 gold bull market I was the classic newbie who bought during the mania top.
I was one of the last buyers and was merely exit liquidity for the smart money.
The fact that I felt pressure to buy and buy quickly is a classic sign that I now recognise as a mania blow off top.
As an investor you need to be aware of your own emotions and that of the market in order to be able to buy low and sell high.
The good news is that while I made the mistake of buying high, I developed the intestinal fortitude to hold on through the dip. I didn’t sell, I bought more.
5. Dollar Cost Averaging Is Important
I held off buying gold as it fell in the years immediately after the blow off top.
But I dollar cost averaged into a nice position from 2014-2018 and I haven’t bought any more since.
I didn’t set up an automatic payment or anything, but I just smash bought when the price was low during those years in anticipation of much higher prices to come.
It meant that I brought my average cost down and alleviated the mistake I had made in 2011.
6. Consider Both the USD Price and the Local Price
As a kiwi whose local fiat currency is highly volatile against the USD, I have long struggled with whether I should measure my investments in USD or NZD.
For a long time I only considered the USD.
However, I earn my salary in NZD, invest with NZD and my mortgage is in NZD. My number one financial goal is to buy a bigger house which is denominated in NZD.
So actually, it makes way more sense for me to look at the NZD price of my assets.
But since global assets are priced in USD you can’t ignore the USD price either since the NZD price is merely the USD price multiplied by the exchange rate.
If you are not an American, I would highly suggest you look at prices in both currencies when performing your analysis.
7. The Dollar Price of Gold Is Based on the Confidence in the Fiat System
When I first read about gold the hard core gold bugs made it seem like the collapse of fiat currency was imminent.
This rhetoric only intensified after the 2008 financial crisis.
That’s why I panicked into gold.
But the Fed came the rescue with QE, the markets breathed a sigh of relief, stocks rallied and gold topped.
Now, I’m a hard money guy through and through and I don’t believe for a second that the Fed actually rescued the financial system with QE. I know they just kicked the can down the road.
But it doesn’t matter what the small number of people who understand sound money think. What matters is what the broad market thinks.
The massive injection of liquidity into the markets satisfied people to move out of safe haven assets like gold and back into risk assets like stocks and real estate.
That is why gold topped in 2011 and did not continue to rise.
Confidence in the fiat system, even if it was misplaced confidence, was restored and therefore the dollar price of gold fell.
What I learned was that the price of gold was essentially a proxy for confidence in the Fed and the fiat system.
When confidence is high the price is low. When confidence is low, the price of gold is high.
Therefore it does matter to listen to the Fed and see how the market reacts as this does have an impact on the price of gold.
8. Diversification Matters
When I first bought gold I didn’t have a lot of money, so I didn’t bother with diversification.
I just put it all in gold.
But that was also a function of needing to buy a full ounce and of brokerage costs being prohibitive for someone with a low net worth. New Zealand didn’t have low cost brokers back in 2011.
If I was in the same position now I would have opened up an account with a low cost broker and I would have diversified. I would have bought shares in GLD rather than a full physical ounce and I would have put some money into stocks.
Conclusion
17 years after I first read the investment thesis for gold and 13 years since my first purchase, I am still bullish on gold.
Gold is an international and historically important form of money.
It will protect my purchasing power and insure me against market turmoil. It reduces risk because it takes some wealth outside the financial system and outside the risks caused by depreciating paper currency.
When priced in dollars, gold’s price can fluctuate in the short term. However, in the long term, I trust it to preserve my wealth.
I don’t buy gold to get rich, speculate or to build wealth, I buy it for safety and security and the avoidance of loss.
And after the lessons learned in the 2011 bull market, I am well positioned for the next big run in gold.
This time, as Jim Rogers likes to say, hopefully I’ll be smart enough to sell the top.
Sources
Bernstein, Peter L. The Power of Gold : The History of an Obsession. Hoboken, N.J.: Wiley ; Chichester, 2012.
Rickards, James. The New Case for Gold. London: Penguin Business, 2019.
Image Credits
Gold Maples by Sabrianna on Unsplash
Ron Paul is licensed under CC-BY-3.0
Gold Chart by Trading View
