The Rumors of Gold's Demise are Greatly Exaggerated

In the past few weeks we have seen the price of Gold take a major hit and witnessed some pretty extreme moves both up and down since the big sell off began.  This recent action has led many in the media to declare the bull market for Gold over and ever-lower Gold prices are on their way.  The most important thing to keep in mind is that whenever any market makes a big move in either direction, over-reaction to the move is always the norm.

Right off the bat let me say that I have been and still am, long-term bullish on the price of Gold.  What we have witnessed in the past few weeks is, in my opinion, a long-overdue correction in the price of Gold that has been kept artificially aloft, in part, by the loose monetary policy employed by the Fed.  No market ever moves in a straight line and Gold is no exception.  Periodic corrections, especially in a long-term bull market are expected and reflect the amount of money moving into and out of the market due to any number of factors. 

Central Banks:

In the past four years we have seen virtually all of the central banks of the world consistently add to the amount of Gold they hold in reserve.  Traditionally, central banks will buy Gold when the economic outlook is positive and sell Gold reserves to increase cash during times of economic crisis.  This is no longer the case, with one notable exception.  Cyprus’s central bank recently sold some of its Gold to try to manage the small European nation’s financial woes.  Analysts point to that move as triggering the recent big sell-off.  More telling than Cyprus’s sale was the central banks of Russia and Turkey as well as the International Monetary Fund (IMF) adding to their Gold reserves last month.  There is no indication that any other central bank is looking to sell some of their reserve Gold at this time and I would actually look for reports of more central bank buying as Gold prices dip.  Monitoring the activities of the central banks of the world will give you a good idea of the long-term prospects for Gold.

Physical Gold:

The demand for physical Gold, the kind that comes in coins, bars, bricks and is worn as jewelry is still going strong.  China, India and the rest of Asia have demonstrated an almost unquenchable appetite for the yellow metal.  A while back I read a startling statistic:  There is more Gold owned and worn by the housewives of India than there is in Fort Knox.  All conspiracy theories aside, that is pretty impressive when you think about it.  Individual ownership of Gold is a huge component of this market on a global scale and it doesn’t seem to be abating.  That bodes well for the long-term value of Gold.

Gold as a Financial Instrument:

Gold has traditionally been considered an effective hedge against inflation, so in an inflationary, or anticipated inflationary environment, owning Gold was considered a good way to mitigate the loss of asset value due to inflation.  Over the past five years a funny thing has happened to how the financial industry views Gold.  Gold has become an almost “Jack of all Trades” in the financial world.  Central banks, financial institutions, hedge funds, multi-national corporations and individual investors have all touted and bought Gold as a hedge against inflation, DE-flation, currency risk, debt exposure and equities risk.  In nearly every case, the nature of Gold as a tangible hard asset and its universal recognition as holding value is cited as a good reason to make it part of the aforementioned groups’ financial strategy.  Gold has now become an integral part of a significant portion of the financial world.  That isn’t going to change any time soon.

Gold as a “Safe Haven?”

The term “Safe Haven” has long been a pet peeve of mine, and never more so, than when it is used to describe any commodity in general and Gold in particular.  In my opinion, Gold is not, nor ever should be, considered a “Safe Haven”.  Gold is a physical commodity and financial instrument.  It is traded on a global market and has historically demonstrated extreme volatility at times.  Any instrument that can double in price or have its value cut in half in a short period of time is not a “Safe Haven”.  That being said, Gold does serve a very real purpose and is a valuable financial tool.  Careful thought and vigilant risk management should be applied in determining the role Gold should play in any financial strategy.  Understanding the risks and actual value at risk (VAR) are crucial when buying Gold or any other asset-based instrument.  If you only listened to all of the Gold pitchmen on TV, you would think Gold only moved in one direction and it was the one “sure thing” in today’s world.  Sister Carlotta from my Catholic School days used to repeat that old trope about the only certain things were death and taxes with meeting God, understandably being thrown in.  With all due respect to Sister Carlotta, my more than 20 years of experience in the financial markets has taught me that when it comes to trading, there is absolutely no such thing as a “sure thing” especially where Gold is involved.

The “Experts” Weigh In:

 Goldman Sachs and George Soros have recently declared that the nearly fifteen year bull market in Gold has reached its end and we will see lower Gold prices from here on out.  Regardless of what you think of either of them, the reality is that both Goldman and Soros carry tremendous influence and are looked to by many in the financial world for guidance and direction.  In a lot of ways it is a sort of self-fulfilling prophesy: both know their words move markets, so if they put out a forecast, more than a few people and firms will act upon it, creating the very result predicted.  But this is also the beauty of the market: for every buyer there is a seller, nobody is ever right all the time and many “experts” put out forecasts based on their own position in the market.  (Full Disclosure: I do not hold any positions or financial interest in Gold or its related markets) 

My Gold Forecast:

As I mentioned above, I am still long-term bullish on Gold.  No market ever moves in a straight line and corrections are a part of any healthy market.  That being said, over the next few months, owning Gold is not going to be for the faint of heart.  I anticipate volatile swings, both up and down before the market settles down and resumes its upward trend.  I am looking at the $1240 - $1260 area as a likely place for the market to find support and start to form a base.  It will be a long road for Gold to regain its all time highs, but I believe it will eventually get there.

There are a lot of factors that affect the price of Gold and all commodities.  Some are well known and are watched closely, while others will pop up from time to time and catch even the savviest financial professional by surprise.  That is one of the things that I find fascinating about the markets: sometimes the “experts” can be as wrong as anyone.