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Published: July 15, 2010
I came up with a Simple Strategy to tell
you when to own gold... and when not to.
It's so simple, you could teach a monkey to follow it.
Best of all, $10,000 invested in this Simple Strategy would have
turned into nearly $2 million. Just buying and holding gold over
the same time period would have turned $10,000 into just
$300,000.
The chart here tells the story... The blue line is the Simple
Strategy. The gold line is the price of gold:
Not only did this Simple Strategy dramatically outperform the
price of gold, it did so with substantially less volatility...
My Simple Strategy managed to steadily rise from the lower left
of the chart to upper right. It almost entirely avoided gold's
big fall in 1975-1977. And it generally avoided gold's
two-decade fall from 1980 to 2000.
The Simple Strategy is so simple, it's almost embarrassing. But
it is based on an important point. Let me explain it...
How do you know when it's a bull market in gold? Sometimes
people will say, "Oh, it's not a bull market in gold... It's
simply a bear market in the dollar."
You see, if the U.S. dollar is crashing against other
currencies, it's probably also going down in terms of gold. That
can make it look like gold is in a bull market. But what if gold
is falling in terms of the euro or the yen? That's not a gold
bull market.
So what is a bull market in gold?
One simple definition is: when gold is going up in terms of the
world's most important currencies. I took a look at the four
most widely traded currencies... the U.S. dollar, the euro, the
British pound, and the Japanese yen. And I came up with my
Simple Strategy. Here's how it works:
If gold is up versus all four currencies over the previous
month... buy gold. Repeat the next month.
That's it.
When I tested it over the last 40 years of data, the results
were astonishing... When gold was up versus all four currencies
in the most recently ended month - when my Simple Strategy
flashed a buy signal - gold rose at a compound annual rate of
35%. My Simple Strategy was in buy mode about a third of the
time. (All the rest of the time, astoundingly, gold lost money.)
If you simply bought gold when you got a signal and then
switched to cash (Treasury bills) when the signal was off, you'd
have turned a $10,000 investment in 1971 into nearly $2 million
today.
Since 1971, the price of gold has risen at a compound annual
rate of 9.2% a year. By using this much less volatile Simple
System, where you're invested in gold about one-third of the
time, your wealth would have compounded at 14.5% a year.
This system is simple, but it's sound... History shows that a
great predictor of when gold will go up is when it's already
going up versus the major currencies.
It would be easy to refine my Simple Strategy to produce more
dramatic results (and chances are we will for a future product
we're working on). Or you could leverage it up with a
double-long gold fund, for even bigger profits.
But at the very least, now you know how to find out if
conditions are bullish for gold.
In case you're curious... we're in a bull market in gold... and
we have been since March. Each month, gold has been up against
all four currencies. Trade accordingly.
-- Steve Sjuggerud
Editor
Daily Wealth
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