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In spite of some short-term fixes, there remains no
real resolution to the sovereign debt issues in many European countries. We're
certainly not spending less money in the US, and now we're bailing out Europe
via currency swaps with the European Central Bank. Shouldn't gold be rising?
Yes, but nothing happens in a vacuum. There are some
simple explanations as to why gold remains in a funk.
- The MF Global bankruptcy, the seventh-largest in
US history, forced a high degree of liquidation of commodities futures
contracts, including gold. Many institutional investors had to sell
whether they wanted to or not. This is similar to why big declines in
the stock market can force funds and other large investors to sell some
gold to raise cash for margin calls or meet redemption requests.
The dollar
has been rising. Money fleeing the Eurozone has to go somewhere, and some of
it is heading into US bonds, which means first converting the foreign
currency into dollars.
- It's tax-loss selling season, something that's
also impacting gold stocks. Funds and individual investors are selling
underwater positions for tax purposes. Funds also sell their big winners
to lock in gains for the year and dress up quarterly reports.
These forces have all acted to depress the gold price.
Notice I didn't say that gold has suddenly become
viewed as a poor safe haven. Nor that many of the world's major currencies
are no longer being debased… nor that global sovereign debt issues are
resolved… nor that interest rates are positive. No, the fundamental
reasons for owning gold are still intact. So don't let the selling depress you.
Let's put gold's recent price action into perspective.
It peaked on September 5 at $1,895 (London PM Fix) and has thus been in
decline for about three months. Yet look at the bull market's biggest
three-month correction in relationship to the ultimate trend.
Gold fell 20% from August 1 to October 31, 2008, the
biggest rolling three-month decline in our current bull market. And yet, it
eventually powered much higher, in spite of many investors and industry experts
thinking it had peaked at the time. The final quarter of 2011 ended down 5.5%
over the previous quarter.
The point? Don't confuse short-term volatility with
long-term forces. The investor who looks only at today's headlines is prone
to making ill-timed decisions.
I realize that prices could trade lower – but
this is why we keep a high level of cash. By the time this bull market is
over, our current pullback will probably look something like the small red
box in the chart above, with far higher prices in the intervening months and
years.
Which makes current prices a buying opportunity. I
don't know if we're at the bottom of our recent decline or not – but I
do know where gold and silver are ultimately headed Casey Research's Chief
Economist and Editor of The Casey Report, Bud Conrad, is convinced
gold will hit $2,000 in the first half of this year. If he is right, the
opportunity to buy at today's levels will be fleeting.
In the meantime, stay the course with your precious
metals investments, no matter how the short-term picture looks. Gold stocks
remain undervalued, and these are turbulent times. They appear to be far from
over. Gold remains the #1 asset protector.
[Don't let
your savings continue to be robbed by government policies. Start protecting
your wealth today.]
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