The current correction in the gold price will not last long
Equity markets across Asia fell with Japan's benchmark Nikkei hitting a five-month low as exporters were hurt after the yen strengthened against the euro. Palladium fell more than 11 percent, and platinum dropped more than 7 percent on worries about the continuing problems in the Eurozone and on worries about weakening industrial demand for these metals as Europe's debt problems are seen hurting the region's economy.
The euro continued to slide south and reached a low of 1.2143 after Merkels' announcement of a ban on naked short selling. The S&P 500 breached the intraday low of May 6's panic selling. Crude oil also tumbled sharply and hit the lowest level since July of 2009.
While investors have been scrambling to exit anything euro-denominated, the US dollar has been bid up as a safe haven play. The rising value of the US dollar has really hurt many commodities, and gold has been no exception. In one week it lost five percent of its value against the US dollar.
The dollar index traded over 87 the highest level since March 2009. Since November 2009, the greenback has gained nearly twenty percent in value even though the fundamentals influencing the dollar haven't really changed. What has changed is the value of the other major currencies against the dollar, especially the euro and sterling. So for now, the dollar has been saved. But, it is only a matter of time before it heads south again.
While traders and investors turn their attention to the forex markets, I have no doubt that gold will soon re-emerge as the safe haven for investors and in a few months time this current sell off will be looked upon with hind-sight as another major buying opportunity.
Even though the price of gold is off its recent highs, the fundamentals have not changed. A quarter century of uninterrupted and unprecedented credit expansion that begun by the US in the 1980s, came to an abrupt halt years later in August 2007 when global credit markets froze, precipitating an economic crisis the severity of which surprised all except those who expected it. Since then we have seen turmoil in the financial and currency markets. And, if you believe that these problems are going to be solved in the next few weeks, I urge you to think again.
I believe the current sell-off in gold can be attributed to traders and speculators on the futures markets. However, bear in mind, as I have stated many times, trading is not investing. Trading is a short-term thing. You enter a position with the expectation of exiting it quickly. That can be anywhere from 30 seconds to 3 months depending on your strategy. Investing is a longer-term process, generally lasting years. In order to trade successfully you need a trading plan. You need to know your entry and exit levels as well as your stop-loss levels. But, these may differ depending on whether you are a scalper, a day trader, a swing trader or a position trader. I am sure that traders will soon cover their short positions, and gold will resume its upward move. As an investor these short-term pullbacks should only be regarded as temporary as well as buying opportunities.
With sovereign debt around the world exploding, governments are going to be forced to print more money to fund these massive debts. And, as history has shown us, this system of paper money (fiat money) always fails. The reason paper money systems always fail is because they provide no practical limit to credit. New currency reserves can always be printed. Bad debts are funded with more debt. This ability to simply manufacture money will continue as long as there remains confidence in the system.
Unfortunately, at some point, the debts become so large the whole system simply collapses and all that paper money becomes worthless.
This scenario is frightening and if you simply choose to ignore it, you will be financially destroyed over the next several years. And, the only way to protect yourself against this trend is to hold real assets including metallic money such as gold and silver.
The 3 year chart clearly shows that gold resumed its upward trend from October 2007. And each time it has traded close or on the green support level of the upward channel, it has rebounded. Even if this support line is breached, the trend has not changed. The price of the yellow metal has now firmly established support above the US$1000 level with an upward bias. My medium-term target remains US$1350. But, this is only the beginning of this next leg up.
About the author
David Levenstein is a leading expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on SABC 3, CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He is also a regular commentator on www.kitco.com, www.mineweb.com, www.gold-eagle.com, and www.infomine.com David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.