Gold price drop offers buying opportunity

The recent hard falls in the price of gold and silver, where hundreds of tonnes of paper gold were sold onto the markets over 2 days on Friday the 12^th and Monday the 15^th of April dropped the price of gold to nearly 1000 euro an oz by close of business that Monday. Given the slow sideways to negative price movement of the metals for the preceding six months this perhaps represented a final capitulation by professional traders and ETF’s in gold.

What has been so interesting about all of this is the response of individual investors to this dramatic price fall – the period since this price fall has seen the busiest period of the year for most bullion dealers (including ourselves). Supply shortages have developed across the supply chain as customers flooded back into the metals markets to pick up bargains in gold and silver coins and bars. This has been evident worldwide but perhaps most spectacularly in Asia where Chinese and Indian buyers have been falling over themselves to take advantage of this ‘firesale’ in the metals.

At the same time as ordinary investors are proving the appetite for gold is as strong and perhaps stronger than ever the financial media is focusing on golds 20% price fall from its peaks last year. For instance, yesterday the Bloomberg website headlined with stories about the ‘Gold price rout’ and how gold could fall to 800 dollars in the next few months. At the very same time the actual gold price was up more than 2.5% yesterday while the Dow Jones was only up 0.17% – perhaps telling a more accurate story than the headlines. An interesting trend is emerging where the financial media is trying to drum up interest in stocks and slamming commodities particularly gold, but the private investor isn’t buying into this story of the ‘end of the gold bull market’.

In many ways this current period in the gold market  is reminiscent of the mid 1970’s where the gold price dropped by 50% in 1975 and 1976 but then posted gains of over 500% in the following five year period. What has been highly unusual has been the straight upward trajectory of the gold price for the last decade with so few sharp corrections. This 20% pullback is very healthy for the market and represents, in our opinion, one of the great buying opportunities of this huge gold bull market. The mainstream media is playing the story of a huge US economic recovery and a new goldilocks economy but a quick look at the real world numbers for sovereign debt, unemployment, US trade data all paint a much grimmer picture than that which is portrayed by CNBC, Bloomberg et al. This suggests the strong run up in the Dow Jones to the 14700 level today maybe somewhat premature and further forward progress for stocks depends entirely on the Federal Reserve renewing its commitment to QE – without this easy money the stock market will hit a brick wall.

Our expectation is that weaker than expected US economic data and renewed deflationary threats will force the Fed’s hand to not only sustain current levels of money printing but to increase the dose over the next 18 months. If the market suddenly realises that all the talk of a withdrawal of QE by the Fed was just a smokescreen and doesn’t reflect reality this is likely to lead to another major upward movement in the metals prices. At that point, with the benefit of hindsight, investors are likely to realise what a great buying opportunity April 2013’s price falls were.