The October Price Dip

Thursday, 11 October 2012
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Published in From The CEO

Taking its cue from the euro, Gold backed off its important $1,800 psychological level.  The yellow metal wasn’t helped at all by hedge fund selling.  As we’ve stressed a number of times here at The Investor’s Corner, hedge funds like to take short-term profits.  Hedge fund managers are highly opportunistic, and accumulation for the long term is ordinarily not part of their game.  Rather than be deterred by the price drop, you should view it as an opportunity.  Better to buy and wait than wait and buy.  Based on most current predictions by experts, the current price of $1,765 per ounce provides an excellent point at which to enter the market.  If you were fortunate enough to begin purchasing at $1,200 per ounce or even lower, you’d be wise to dollar-cost-average subsequent purchases as gold moves up.


We should realize that gold is now hungry for some news in addition to quantitative easing to make another big move.   Another factor playing into the stall in gold is that the U.S. dollar made its most aggressive move up in over two months versus a basket of currencies.Although the  Fed’s reckless printing of money still remains the biggest catalyst for the gold price, investor patience can easily be distracted from the fundamentals during a short-term correction like this. 

Ultimately, the effects of quantitative easing will express themselves in terms of inflation.  What the careful gold investor needs to keep in mind during a dip in price are the sage words of Warren Buffett which we’ve quoted before:  “be fearful when others are greedy, and greedy when others are fearful.”

Much of gold’s hesitancy right now can be tied to the euro, since they both move inversely to the dollar.  And the euro is reacting to the reduced International Monetary Fund forecast of global growth from 3.5% to 3.3% for this year and 3.9% to 3.5% for next year.  The IMF also predicted a reduced growth percentage for the 17-country euro economy to 0.4% this year and 0.2% in 2013.

Through it all, the World Gold Council reports strong activity for gold on the demand side.  In August, central banks bought 15.2 metric tons of gold.  Most of this can be traced to the central banks of emerging markets.  Turkey bought 6.6 metric tons, the Philippines 4.6, the Ukraine 1.9, Kazakhstan, 2.6 and Taiwan 0.9.  These and other banks are careful to purchase on price corrections, so look for these and other central bank purchases to lend support to gold during price dips like the current one.

Meanwhile further monetary easing looms in the not-too-distant future.  Spain and Greece have still not come forth with an official request for a bailout.  But it’s just a matter of time.  Things are growing worse in both countries.  For many years, the Red Cross has appealed to Spaniards for money to help starving children in the Third World.  But, according to National Public Radio, the current European debt crisis has now brought about starvation in Spain itself.  .

The Spanish Red Cross today launched its first-ever fundraising campaign for Spaniards to donate directly to other Spaniards. The aid organization estimates that some 300,000 additional people in Spain are vulnerable to hunger because of the economic crisis.  The country reports an overall unemployment rate of 25%, and more than half of 20-somethings are unemployed.

The economy in Greece is just about as dismal.  Once the European Central Bank makes bailout funds available to both countries, expect the resulting monetary easing to ultimately reflect itself in the price of gold.

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.