The case for gold is still strong

With another sell-off in precious metals leaving gold below $1,600, there is of course much talk in the media about the “death of the gold bull market”. But have the fundamentals really changed? Or is this now a chance to buy gold at a more attractive price? The truth is that no recent news supports the case for the end of the gold bull market, and little evidence to support the idea that the financial system is on the mend.

The elections in France and Greece have increased eurozone instability, and will likely encourage further efforts from the European Central Bank to weaken the euro, in an effort to appease socialist critics of Brussels’ austerity drive.

In India, finance minister Pranab Mukherjee announced that he was going to withdraw the excise tax that he placed on gold earlier this year. India and China are currently the largest consumers of gold and a further reduction in the cost of gold to consumers in India should increase demand. The introduction of this excise tax was cited by many as one of the reasons for the gold price decline earlier this year, and the removal of this tax should support precious metals.

Reports from China are that gold imports from Hong Kong have also increased significantly and that the country is overtaking India as the world’s top consumer of the metal. Imports from Hong Kong were 135,529 kilograms in the period January to March, up from 19,729 kilograms in the same period of the previous year, according to data from the Hong Kong government’s Census and Statistics Department. While year-over-year comparisons can sometimes be misleading as the situation is never static and other variables change over time, it still seems to be a significant increase that points to growing Chinese demand.

At the same time while tensions between Iran and the west have mercifully yet to transition into a military clash, they have helped encourage the development of an oil-for-gold barter market. Japan is considering insuring oil tankers carrying Iranian crude, while the World Bank has come out and joined a growing list of parties opposed to the sanctions dictated by the United States. An increasing number of developing countries are no longer willing to kowtow to Washington’s agenda, and have begun exploring the creation of new mechanisms to facilitate non-dollar trade. The geopolitical situation thus grows ever more fraught.

So while precious metal prices are lower, this is a short-term sell-off rather than an end of the road for this bull market. Price volatility will only increase from here. But by preparing for these situations and understanding these risks, investors can position themselves to either capture additional edge from this volatility or at least feel confident about the positions they already hold. Do not lose sleep over short-term price moves.

Author: Chris Marcus

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