By: John Melloy
Executive Producer, Fast Money & Halftime
Gold ended last year in violent fashion, dropping 21 percent in less than three months. The sudden move, coming as equities rebounded in December, raised doubts among many investors about the sustainability of a trade that has been a winner for 10 years.
But these kinds of moves are simply par for the course, said the long-term gold bulls. It’s just a way of shaking out the weaker and more speculative investors that pile into the metal for a short-term trade, they said.
After bottoming on the final day of 2011, gold is back at it again, up five percent in the new year, compared to a 3.9 percent return for the S&P 500 index. Despite the volatile ending, gold finished up 2011 by 10 percent, while the benchmark for U.S. equities was virtually unchanged.
“In my view, gold is still very much in a super bull market,” said Alan Newman, who’s made his clients money for a long time by recommending the metal in his CrossCurrents newsletter. “Last year’s activity was quite normal for a super bull market, in which corrections are supposed to be scary.”
Gold fell 8 percent in January 2011. The metal plummeted 12 percent in two weeks at the end of 2009.
“Such corrective price movements have been evident throughout the 2001-2011 bull market, especially since the acceleration in the uptrend from 2009,” according to a Morgan Stanley research note to clients Tuesday.
“Moreover, the timing of the sell-off, especially to the sell-off low in late December, suggests strong selling pressure linked to year-end book squaring, portfolio adjustments and commodity index reweighting.”
Gold’s drop at the end of the last year also came amid a string of strong domestic economic data. If the economy, and subsequently the stock market, can recover on their own merits through rising employment and capital investment, then that could spell the true end to the gold bull market, investors said.
But many bullion bulls doubt that can happen, especially with the European Union now having to print their way out their own financial crisis this year. For the last 10 years, they’ve been right.
“The balance sheets of the Federal Reserve and ECB have never been greater and both will continue to increase in size,” said Peter Boockvar of Miller Tabak. “The Bank of Japan, the Bank of England and the Swiss National Bank continue to print large amounts of money. As long as ‘print and inflate’ is policy this bull market in gold will continue.”