Some Silver Lining in Gold Price Drop

It’s hard to find any good news in the precipitous gold price drop that occurred over the last two trading sessions, but a scan through the Web shows that some gold market commentators are remaining positive and not crying “bear” for the gold market as many in the mainstream media appear to be doing.

First off is Peter Schiff, founder of EuroPacific Capital and renowned gold supporter, who is quoted by CNBC as saying that gold will regain strength despite the current sell-off. Schiff wrote:

“While nations buying gold will pay for their purchases with dollars, the sellers will not re-invest the proceeds into Treasurys. Dollars raised through gold sales will be converted to local currency and used to repay debt.

“This will put downward pressure on both the US dollar and Treasurys. In addition, emerging market central bankers will be more likely to hold onto gold for the long term, thereby providing a bullish impact on the market. In essence, such a shift would flush out the weak hands who don’t have the resources to protect their wealth in favor of stronger hands that do.”

In the article that quotes Schiff, author Jeff Cox noted that the gold selloff is unlikely to have much impact on other markets, arguing that similar events have actually moved stocks higher.

“Precious metals are coming off the same reason the stock market is going up — because confidence is improving,” he quoted Jim Paulsen, chief market strategist at Wells Capital Management, as saying. “You see that armageddon premium in gold and silver coming out.”

US precious metals analyst Jeff Nichols said in comments to Mineweb that the gold price was driven “insanely lower” on Friday, meaning the drop was caused by “technical and computer-driven me3 trading mainly in futures, forward, and options markets, rather than by any change in fundamentals or in the states of the U.S. and global economies.”

While not predicting Monday’s even worse gold price fall, Nichols sees high volatility short term but long-term strength building:

“… short term the market remains vulnerable to more insanity. Who said markets are always rational? Indeed, the stars remain favorable for gold and rational analysis suggests that prices will go significantly higher over the next few years.”

Bullion Vault‘s Adrian Ash laid out four things to remember during gold’s drop:

1. Stockmarkets have risen — and expecting gold (aka crisis insurance) to rise at the same time would be illogical, if not greedy.
2. Gold’s chart pattern is horrible — we’re no “technical analysts,” but plenty of professional gold traders are.
3. Beware “bear market” talk — the newswires today all point to gold now being in a “bear market.” But in both mid-2006 and again in late-2008 the gold price fell harder, down more than 25 percent and 33 percent, respectively, before resuming the upward trend.
4. Gold has risen so strongly, for so long, a big setback has become overdue — and if this drop does prove merely a pullback instead of the end, it could still cut much deeper yet.

For true gold bugs, the correction is temporary and is a buying opportunity.

Alan Knuckman, chief market strategist at Optionshop, said in a Bloomberg video that while gold has fallen 12 percent since January, the dollar may be topping out. “That could help gold in the long run, if you can get through this capitulation, and be there when it does recover.”

Jeffrey Sica, quoted in The Washington Post, said central bank stimulus programs will continue to buoy gold prices.

“I see gold being much more stable,” said Sica, president of Sica Wealth Management LLC which oversees over a billion dollars in assets.

“The Fed will not stop printing money, and the quantitative easing will go on until at least the end of the year. What Japan is doing and what the U.S. is doing will continue to support gold prices in the future.”

For gold investors, there is good news and bad news. For those who still support the fundamentals of the gold story — gold is a hedge against inflation/ currency depreciation, is a store of value, and has robust physical demand particularly in China and India — the good news is that gold was due for correction and the market can price that in for a more gradual, and realistic, price rise long term. The bad news is for those who bought gold on strength in the last year or two, they may be waiting some time for the metal to appreciate before taking profits.