Thursday, July 15, 2010

Intriguing, If Risky, Gold Buying Technique

Dr. Steve Sjuggerud has come up with an interesting strategy to stay in gold during a long-term bull market and get out when the bear market comes. It depends upon the gold supercycle, in which a fairly steady bull market is followed by a long-drawn out bear. He calls it his "Simple Strategy," and it works like so:

Monitor gold prices in four major currencies: the U.S. dollar, the euro, the British pound, and the Japanese yen. If gold is up in terms of all four currencies in the previous month, then buy (or hold) gold. If not - if the metal is down in terms of any of these four currencies - then cash in the gold and put the proceeds in a money-market fund. Keep the funds there until gold has increased in terms of all four currencies in the previous month.

Presumably, a gold accumulator would add the new funds to the switch when the signal first flashes "buy," and would add if the latest month shows the same signal after the other funds have been invested with gold. If the signal flashes "sell", or "don't buy," the adds would go into the money-market fund.

It's an intriguing idea, despite the potential for being nickel-and-dimed to death through whipsaws that would be exacerbated by buying and selling physical gold. Gold does tend to move in long-term waves, which makes the strategy ostensibly practical. One variant would be to shift into stocks instead of gold because long-term bear markets in gold tend to accompany long-term bull markets in stocks. [1980-2001, for example.]

He claims a 14.5% return over the past forty years using this strategy, but it's the result of backfitting. He doesn't say what he used as a proxy for the Euro before it came into being.


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