Gold is Doing its Job

Recent reports would attribute this buying to central bank buying with China alone increasing it's gold purchase in Q1 2012 by 600% over Q1 2011. Some estimates are for central banks to buy 700 tonnes of gold this year.  It is on this premise that many predict the gold price to rise significantly, even before year end.  Eric Sprott of Sprott Asset Management puts gold up 25% by year end, Citigroup predicts gold to double by 2013 and market guru Marc Faber says gold could triple.

This news of high demand has created conflict in the minds of investors.  If demand is so high, why has the gold price been in pull back mode for the last 8 months?  The answer is really quite simple.  Gold is doing its job.  That's right!  It's doing the same thing for investors today as it did in 2008 when the credit crisis struck.

In 2008 markets were collapsing, housing outright crashed and investors scrambled for liquidity.  Margin calls were outweighing equity positions and those who were diversified with gold were forced into selling the only asset they had that still held equity.  That activity caused the gold price to pull back from $1075 an ounce all the way down to $680.  Don't we all wish we could have backed up the truck and loaded up at a price that now looks dirt cheap.

As the markets plunged it was the Fed to the rescue.  QE1 was announced and the gold price zoomed past $1200 an ounce - almost doubling in just 18 months.  To follow, albeit somewhat less dramatic, was another pull back in the price.  This time the pull back was met by QE2 and the price pushed above $1900 an ounce. Again, many looked in the rear view mirror and wished they had sold the farm to own gold at just $1200 an ounce.

Then all Europe broke loose as another credit crisis began to ravage European markets.  Once again gold was called on to do its job as investors scrambled for liquidity.  Insider reports tell stories of European banks selling long-time gold holdings in order to pass stress tests.  Liquidity was in high demand and for many gold was the only place to get it.  Again, gold did and is still doing its job as evidenced by the price pull back we bear witness to today.

So now that it's settled and we all agree gold is doing its job, the only question remaining is whether central banks will continue Quantitative Easing.  Hmmm!  Maybe that's why they are buying gold by the hundreds of tonnes.  If you had the power to print money and intended to do just that - what would you invest in?