Wednesday, March 4, 2009

Current Drop in Gold Prices Temporary

Current Gold Price Dropping on selloff On March 3rd gold fell for the eighth straight day, in its longest consecutive drop since June 2006. This is thought to be for several reasons. The first reason is that government efforts to stimulate the economy reduced fears of a worsening recession, thereby reducing demand for gold as a safe haven. The second reason is that after gold's recent rally that brought its price up over a $1000 once again for the first time since March 2008, many investors and traders were selling off their gold to take profits. Because of these investors getting out of gold, the gold price dropped to $906.65 per ounce at its lowest point on March 3, and coming back up to around $911. The spot gold price may hit $900 in the short term.

But there is very little doubt that these declines are temporary. The first cause of the recent drop in the gold spot price is reduced demand for a safe haven because of government stimulus efforts, but in the long run these massive injections of new currency are guaranteed to weaken the US dollar (and fiat currencies of other countries that print new money out of thin air) and compound economic problems, trading a big storm now for a huge storm down the road. So while in the short term people may feel relieved of their need for a safe haven, in the medium term they will definitely be looking for that safe haven once again.

The second cause of the current drop was a simple selloff as people tried to take profits before everyone else did. Traders will always cause this kind of swing in prices as they try to sell high and buy low at frequent intervals. Their impact is negligible because they will likely put their money back in as soon as they see prices are rising again. Similarly, longer term investors will likely put their money back into gold when they realize that the precious metals bull market is far from over and that gold market prices will continue to rise.

Indians sell unwanted gold jewelry while gold prices are high.Another phenomenon that may be leading to dropping prices is a selloff of gold jewelry and scrap gold in India, in response to the recent rally in gold prices. But many of these sellers' simply know how to sell gold jewelry at high prices and buy it back when prices drop, as is happening now. So there was a reduced demand as prices increased, and there will be increased demand now that prices are dropping. There is an equilibrium here, and the impact of the Indian selloff of gold should be seen as a simple deviation from gold's upward trend. Some Indians sell unwanted gold, simple scrap, when prices are high with no intention of buying it back. But this scrap gold will likely be melted down and used to feed the demand for investment bullion.

Several people I know including my mother have called and tried to convince me to sell my gold, thinking that the prices are in free fall. But I have deep confidence that gold will continue rising in value for the foreseeable future, with periodic selloffs as is to be expected. Gold's fundamentals are strong especially in light of the economic stupidity being enacted by governments around the world. I don't see how gold can not rise. So I will not be spooked by peaks and dips, which are a fact of absolutely any financial chart.


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