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Pullbacks in the Gold market are healthy

Posted by on 25 October 2012

Since the recent and short lived breach of USD1800 on Oct 5 the price of gold has taken quite a tumble, closing today just above USD1700 mark. Once again any precipitous move downwards in the price of the precious metal has produced a myriad of claims from many in the finance community of its imminent demise. I noted that even in the NZ Herald last weekend a well known NZ market commentator had added in his article on a possible property crash that Gold was also showing signs of a bubble (nothing else was included to back up his claim in relation to Gold, he obviously believes that no context information was required). These Market commentators are probably the same people who were claiming that Gold’s run was over when the price fell below USD1550 as recently as May of this year, and other similar calls throughout the past decade whenever Gold has suffered a significant pullback.

I am not saying that this current pullback is necessarily over, after all both the 100 and 200 day moving averages are still quite a way down from here sitting around the USD1650 level thus it is quite possible that this current pullback could target that level, what I am saying is that throughout Gold’s bull run of the last 12 years significant price pullbacks have been necessary (and therefore healthy) for the run to continue over the long term.

With regard the movement in the price of Gold over the past 3 months, it should be noted that the expectation of QE3, followed by the actual announcement of it, caused quite a huge run up in the price. Now of course the market is waiting for the enaction of QE3 to start taking effect, so this latest pullback was not entirely unexpected, even though the severity of it was probably not so expected.

At times like these it is sensible to not panic and to continue to maintain a core holding in Gold, if your expectation (as is mine) that the precious metal has still considerable upside in its future price.

Just remind yourself why you purchased Gold in the first place and reflect on whether any of those fundamental reasons have indeed altered in any way, if they haven’t (and I would suggest that this is the case) then continue to hold Gold and wait to be rewarded for doing so.       

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