The drop in gold prices during July is merely part of a correction in a very strong bull market

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During July, the price of gold fell 5 percent trading as low as $1156/oz on July 28. This price drop in July is the first monthly decline since March, and gold has fallen 6.5 percent from its June 21 record of $1,266.50.

Holdings in the SPDR Gold Trust (GLD), the biggest exchange-traded fund backed by bullion, declined 1.5 percent last week, heading for the biggest weekly drop since April 2009. As of July 30 holdings of the US (GLD) were 1282.279 tons which is up by more than 13% since the beginning of the year.

However, during July, holdings in GLD lost just over 38 tons. At the end of June the holdings were 1320.436 tons. While this liquidation may represent a change in the sentiment of a few investors, it is hardly indicative of a panic sell-off or a major switch out of the yellow metal.

Suddenly, just because the price of gold has fallen from its historical highs the bears have come out of hibernation. And, the number of e-mails I have received in the last week has been astounding. These bears send their messages advising me that the price of the yellow metal is going to plunge to $1100 and then to $900/oz. While I thank these readers for their opinions, I can't agree with them, and frankly, I think it takes a very bold individual to suggest the price of gold is going to drop to $900/oz!

These bears were the same individuals who did not believe that gold would cross the $1000/oz never mind the $1200/oz. And, to suggest that this current bull market is driven mainly by speculators is clear evidence that they have no understanding of what is going on in this market. Believe it or not, I have seen an analyst maintain that the price of gold is driven by the whims of a few housewives in India!  (I just can't wait to hear what he has got to say about silver). Then, there are those so called "experts" who attribute the rise in the price of gold to "fears of inflation." What inflation are they talking about? With flat to contracting GDP growth in most industrialized countries, if anything, at the moment we are in a deflationary environment. But, inflation is imminent. However, it is still going to take some time before we see this. And, then there are those "students" of economics who fail to see gold as a store of value despite the fact that since 2001 it has risen in "value" between 250% and 400% no matter what part of the world you live in. And, then there are those commentators who repeatedly state that gold is a useless investment because it does not pay any interest.

According to my calculations if you invested in fixed interest bearing instruments such as bonds and you were lucky to get say 5% per annum, on a compounded basis it would take 15 years to double your money. My mathematics tells me that even though gold does not pay interest, I would ultimately be better off investing in gold than in bonds. At the moment the yields for 10 year UK gilts are paying 3.32%. Australian 10 year paper is paying 5.2%, Switzerland 1.48%, US 2.91%, Germany 2.66% and France 2.95%. Of course there are government bonds that pay more than 5% pa, such as the Greek 10 year bonds that are currently 10.31%, but then you face the possibility of default. I cannot see the price of gold going to zero.

Of course, past performance is no guarantee of future performance, but when you consider the instability of global economies, and the fact that we are in a global currency crisis that is being patched up by the intervention of the major world central banks, burgeoning global sovereign debt, massive budget deficits of most major western governments, all of which influence the price of gold, I cannot see the price of gold plummeting any day soon. The reason for me mentioning this is because, I maintain there are many advisors in the main stream media who comment on gold but who actually don't have a clue about the gold market. They deal with equities and should not confuse gold shares with gold, the precious metal.

While I do not claim to have any special powers of prediction nor do I claim that my view on gold is the correct view, however, based on my analysis, I believe that this market has a very long way to go before peaking, and that, corrections of 6% or even 15% should be of no concern to long-term investors. And, for those investors who have not yet diversified some of their assets into gold, these dips should be viewed as buying opportunities.

As I have stated, many times in the past, investing is not the same as trading. 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. And, you must understand the arithmetic of trading.  So when the price of gold drops as we have seen recently, as an investor, I do not see it as a bubble that has burst, but as a pull back in a bull market which is a very normal phenomena in any market.

Although the price of gold can be volatile in the short-term, gold has maintained its value over the long-term, serving as a hedge against the erosion of the purchasing power of paper money. Gold is an important part of a diversified investment portfolio because its price increases in response to events that erode the value of traditional paper investments like currencies, stocks and bonds.

TECHNNICAL  ANALYSIS

Even though the price of gold has been trading below its medium-term 50 day moving average, it has held above the long-term 200 day moving average. Also, there was a good rebound in prices over the last three sessions as indicated by the black arrow, and as long as prices can remain above $1155/oz – $1160/oz, then we can expect to see higher prices over the next few weeks. However, a decisive break above $1210/oz and $1220/oz would be required to indicate the resumption of the up trend.

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.

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.