Weak Gold Prices Time to Buy

In the first quarter (Q1), gold broke $1,790. It has since tumbled and is now struggling to keep its head above $1,600. A number of firms have lowered their gold forecasts for 2012, and many investors have scuttled to the sidelines.

“As the markets have increased, and now more recently maybe decreased, the probabilities for easing out of certain central bank players, that’s really been what’s driving gold up and down,” Robert Sinche, global head of currency strategy for RBS Securities, told Bloomberg.

While prices are down, gold investors should be considering strengthening their positions, especially since there has been little change in gold fundamentals other than price direction.

Europe is still an unfolding mess, with one nation after another having its problems exposed, dissected, and agonized over.

TD Securities recently expressed “a very positive view on gold longer term,” forecasting prices of $1,800/oz in Q4 2012. One reason for the firm’s view is that it believes the European Central Bank will eventually be forced to backstop the European sovereign debt problem.

Recently, safety seekers have been piling onto the dollar. Ideally, the rate of investment in the government’s debt would mean that the US has ironed out its budget and debt issues and successfully gotten its economy back on track. However, none of this has been accomplished and many insist that conditions warrant action from the Fed.

Fed accommodation is another reason for TD Securities’ bullishness on gold.

“As such, any downside move toward $1,500/oz due to the upcoming Greek election and Spanish bank bailout flux is seen as a buying opportunity,” the firm said.

Not only are there widespread expectations for more quantitative easing, but there is also a sense of urgency.

“If the Fed wants to do something, it really has to be June 19-20 [an upcoming FOMC meeting] because the window will start to close once the election campaign moves into high gear,” US Global Investors said in an investor alert.

Market participants believe the deal is surely done, but investors should recognize that taking positions in gold based on these expectations is a speculative bet that comes with risk.

Right now the Federal Open Market Committee is divided between hawks and doves in a way that it has never been in the past, said Dr. Michael Berry, who testifies before the Federal Reserve Board twice a year.

However, if QE is forthcoming, Sinche says “that would probably take the dollar lower and as a corollary to that we would probably see gold and a whole host of commodity prices going higher.”

According to Louis James, chief metals and mining strategist for Casey Research, gold is not really where you should be if you are making speculative bets anyway. Speculators should instead be putting money into gold mining stocks, he explained on Breakout.

Still, that does not mean gold investors should be on the sidelines.

Gold is for the conservation of wealth, James said. “It’s the ultimate safe haven.”

Breakout host Jeff Macke questioned this position, saying, “gold is supposed to be a hedge, but it isn’t working that way. Everyone, including the Chinese, are printing money, and while people are scrambling for a place to put their assets, gold should be rising, but it isn’t.”

“Unquestionably, if gold isn’t working right now, you have to look at that as a buying opportunity. Unless you somehow believe in your heart that governments can print trillions of new currency units and it won’t matter,” James responded.

Perceptions like the one outlined by Macke can be a problem. They often result in investors arriving at the party with the crowd. While that may be the popular thing to do, it often comes with the sacrifice of profits.

Many people still are not comfortable with the idea that gold prices only go up. Like other markets, prices can, and do, also come down. When this happens, a lot of chatter tends to erupt about bubbles and an end to the bull run. It can be difficult to drown out the noise and see the opportunities, but in the world of investing, dips are often where the best of them lie.

Even with downgraded forecasts, most analysts are still looking for gold prices above current levels.

For investors needing courage, this midway point may be a good opportunity to recall what analysts said at the start of the year. Many not only predicted 2012 would be a year of more moderate performance, and that investors should be prepared to stomach a lot of volatility, but also forecast that the metal’s strongest performance would likely come during the second half of the year.

If fear and uncertainty are creating a risky environment that is depressing gold price prices, investors who believe in the market should be stacking metal now, not upon of signs of a rebound, when prices are on the rise.

People brave enough to buy when others are not interested know the secret of how to buy low and sell high – they are contrarians, James recently wrote.