It’s a fair bet this morning’s $60 sell off in gold prices caught some precious metals enthusiasts by surprise. Though the markets have been volatile all summer, this is the first time we’ve seen a $100 price drop in less than 48 hours. Gold is currently trading at $1804 per ounce, compared to an intraday high yesterday of $1920. So what does it mean? It means it’s time to take a step back and put this summer’s price movements into context.
First, it’s worth considering some of the factors that pushed gold above $1900 per ounce. The main issue driving gold buying this summer has been the continuing instability in securities markets. The massive swings seen in global stock prices began to drive investors to gold when it was still priced in the low $1600’s back in early August. This effect began to snowball on the heels of the debt ceiling crisis and new concerns about European debt, driving the gold price all the way up to yesterday’s highs above $1900 per ounce. That’s a total of $300 in price increases in just over 30 days.
So what’s causing the drop today? It’s pretty simple: Profit taking and increased risk appetite. Needless to say, this kind of move presents investors with an opportunity to take profits. Seeing as positive returns have been hard to come across this summer in other markets, traders are taking money off the table in hopes of at least showing something in the black. Global stock markets also showed a little more promise this morning, which drew some money out of precious metals as the safe haven play became a little less important…At least for now.
Now let’s make some sense of today’s price movements from a big-picture perspective. First off, today’s slide in and of itself has not done any significant “chart damage” according to analysts from Kitco.com. The midterm bullish trend is still very much intact. Don’t forget we’re still up over $200 per ounce since the end of July. Today’s correction does nothing to deflate the argument for $2000 + gold in the next 60 days. Secondly, we know these corrections have shown to be very short. We had a pull-back of this magnitude last month, which lasted less than a week. Gold bounced back from a low near $1720 on August 25th, to tack on another $200 in price gains within 7 trading days.
Finally, the big picture still rules the long term strategy for successful investors. There are three, very simple, and utterly unavoidable facts in today’s global economy. The dollar is sinking and will continue to do so. The European Union as we know it will probably not exist in near future, and global inflation is coming (some say it’s already here). Until these three driving factors change, it’s hard to make an argument that gold won’t continue to go up.
There will be corrections like this, and they will be severe. These price fluctuations will scare a lot of people out of the market. Most everyday investors will look at today’s correction and let fear keep them from recognizing the extraordinary buying opportunity we’ve been given. That’s just how most people work. Some folks on the other hand, will dive right in and buy this dip. My prediction is that they will be the minority, and that they will come out way ahead at the end of the year.