Dedicated Gold Investors See Price Drop

January 13, 2009 | By | Reply More

Dedicated followers of gold will be aware that gold took a beating in London today and fared no better at the New York open.

Gold has fallen below a major technical support level at $830 an ounce and is currently trading at $826 an ounce (Monday 11.30 am EST).

We are long term bulls of the yellow metal and our stance, based on a fundamental approach, has not altered.

We still expect to see the price reach over $1500 an ounce in the not too distant future, when the consequences of the ever increasing bail out plans come home to roost in the shape of excessive inflation.

To be honest we think that an eventual target of circa $3000 an ounce is not an over optimistic forecast.

However for the next three to six months we must advise caution. Statistically there is a strong argument for the price to drop into the mid $700, even as low as $650 before a sustained upward momentum kicks in.

The fundamentals paint a very mixed picture as signs of deflation take hold and oil continues its precipitous drop to below $40 a barrel from $140 just a short six months ago.

We have argued that linking the movements of gold to oil is flawed reasoning but the fact remains that, despite recent signs that the tie is weakening, more often than not a move by oil corresponds to a move by gold in the same direction.

What, we wonder, will happen to our favourite metal when the oil producers slam on the brakes and cut back on production resulting in the rest of the world being starved of energy until at least $75 a barrel is achieved and becomes the base price.

We read today that hedge fund activity and other ‘big dogs’ have taken a marked increase in bullish forward positions and that turnover activity in the gold options and futures market is way up on 2007.

This leads us to the belief that gold, with silver following in its wake, will be a volatile market as the longs and shorts work their wicked ways on the day-to-day price.

Those who successfully read the statistical runes may have plenty of opportunities for profitable trading as the gold price whipsaws over the next few months before settling into a steady upward trend.

Our problem remains that it all depends on which of the innumerable statistical options we choose as decision indicators, it does seem that any graph can prove a point after the stable door has closed!

Fortunately our positions in gold and silver bullion and ETFs will remain profitable until the price falls below $700 an ounce so we will sit and wait it out.

Not so with our miners, but so far we have not been tempted to cut and run and again we are in for the long haul with probably the occasional profitable adjustment when the opportunity arises.

To us, the fundamentals seem to be so overwhelmingly in favour of an eventual strong and sustained bullish trend that we are not yet losing any sleep worrying about the outcome, but those short-term movements might just shake our complacency.

If we or any body else could outguess Mr Market life would be a bowl of cherries.

Even the sage of Omaha, Mr Buffet, is nursing losses running into billions of dollars and his track record shows that he is nobody’s fool.

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