Current Gold Volatility: No Reason To Panic

Gold is enjoying one of the longest Bull-runs in modern history, with over a decade of price increases. Those who acquired Gold during this time have enjoyed some of the best returns anywhere on any investment. Even at the current trading price of $1630.20 per oz. Gold is still up 15% for the year to date.  This out performs the S&P 500, the Dow & most other investments (including a number of hedge-funds).  There are exceptions of individual stocks doing better but the losers have outweighed the winners for the year to date. In layman’s terms, Gold has been one of the safest investments in the last year & decade.

During times of price volatility as happened over the last month many smart investors lose sight the facts and let emotion dictate their investment strategy. Directly speaking they panic, we all know the price one can pay when panic ensues. Think about Apple stock in 1996 nobody wanted it and were getting out. Yet, a simple $14,000 investment would net a $1.5 mil return today. It is the savvy investor who keeps a cool head allowing the panic of the masses to be an opportunity to improve their position in any investment.

Let us consider the facts:

  • What makes a Bull-run end?  The start of a Bear market. According to The Vanguard Group, While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period. Gold has retracted 18% from its high earlier this month it is still above the close of $1,627 on July 29th. (two months ago)

  • Why is the price dropping?  Gold is being sold to cover losses and margins by major hedge-funds & Wall Street(see A Gold Rush Wanes). These sales are similar to the sell off of Gold holdings that took place to cover losses at the beginning of the Great Recession in 2008.  During that same period of time Gold prices also retracted.

  • September & October are the worst months for the markets is this the signal for another Recession? The average recession cycle is 3 to 5 years between each downturn. Some experts claim we are already well into a double-dip recession while others claim we are just in a slow recovery & growth period. In any case, while the price of Gold can be affected by downturns in the economy the over-all demand and pressure on Gold should continue to give positive returns. For the first time in 20 years all banking sectors are net purchasers in Gold. The Debt Crisis in the U.S. & Europe continues with little resolution that would change the need for Gold as a safe-haven investment. Finally, the demand by an emerging middle-class in China & India is growing to the point of almost 75% of all Gold mined is consumed by these two countries. September through the end of the year is the traditional wedding time in India now is the time they make a majority of purchases.

  • Does the Dollars recent rise have any effect on Gold’s price drop?  Absolutely! The Dollar’s recent climb out of all-time lows is contributing to the Gold price retraction. The Fed & EU banks recently made a plan to keep liquidity of the Dollar available to European banks with out question & at reduced rates for the next three months. This means the U.S. is preparing to help bail-out Europe’s banks with our money. This is good for the buying power of the Dollar in the short term. Long-term it can possibly lead to a default with the tax-payer holding the bag. Gold suffers on pricing in the short term while the long term outlook is bright and shining.

We have always encouraged our clients to consider every retraction as a buying opportunity. We still believe this is true! While no one can tell the future we believe the fundamentals of Gold are as solid today as they were over the last decade. What is happening today is healthy for the long term growth of the metals market. There may continue to be some rough days in the Gold pricing still ahead. Until there is a fundamental change in the global economy that shows a marked improvement Gold will be the only real money you can own today.

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