Yesterday the price of gold pulled back sharply from its all-time high levels “supposedly” on the news that a deal had been reached in the US Congress not to raise taxes above the levels set after the Bush tax cuts several years ago.
We do not share in the sentiment that this news is what caused the pullback in gold.
We believe that what has occurred was a natural technical correction that should have been expected in the wake of gold’s recent sharp strength which propelled it to record heights. No market goes up in a straight line.
However, that said, we advise investors to look at the situation objectively and make sound decisions based on facts and not sentiment alone. Here are a few key facts which reinforce the decision to buy gold now and make a case for higher gold prices going forward:
Key Fact Number 1: In real terms (that is, inflation-adjusted numbers) gold is still trading at levels which are a fraction of its all-time highs. This suggests that gold has plenty of room to move higher.
Key Fact Number 2: The physical gold market is still quite tight. Physical gold supplies are not keeping pace with demand, as illustrated by the fact that the gold futures market is in the rare condition known as backwardation, in which near term contracts and spot prices are greater than futures contract prices. This is also bullish for the price of gold.
Key Fact Number 3: The US fiscal and monetary policies are still quite supportive of higher gold prices. Congress just approved another trillion-dollar-plus spending package and the annual budget deficit and national debt are still sky-high. At the same time, the Fed is doing all it can do to pump more dollars into the economy, which will mostly just serve to debase the currency, making gold more expensive in dollars as we move forward.
Key Fact Number 4: The world is still a tense and dangerous place. The geopolitical climate is poised to at virtually any moment become unfavorable for paper assets and favorable for hard assets with budding crises in Korea, Iran and the seemingly ever-present threat of Jihadist terrorism from India to Western Europe.
Given these four facts alone, investors should be viewing any correction from these levels as an opportunity to add to their gold holdings for the longer-term.