Gold Slides Lower—Time to Sell It All?
Gold has gained a significant amount of attention since the price plunged from trading just below $1,600 an ounce in mid-April to now hovering close to $1,400. It’s very common to hear someone in the financial media say how the yellow metal has no use in their portfolio and, most importantly, that the prices won’t go any higher. Some have even called the price plunge a sign of the bubble bursting.
My take on the issue is that while there’s no doubt that the prices have gone down from their highs, investors who are in the world of investing for the long term need to think on a bigger scale. If declining prices are the sole reason for investors to say gold is useless for their portfolio, then I beg to ask what the 2008–2009 stock market sell-off suggested; that investors shouldn’t hold stocks? Just look at the chart below, which shows gold prices sliding lower:
Chart courtesy of www.StockCharts.com
The truth is that gold can be healthy for a portfolio over a long period of time. Remember that just like stocks, gold prices fluctuate.
Now, can the plunge in gold prices that started in April continue?
In spite of the decline in gold prices, the fundamentals for the precious metal remain strong. The demand is still there; as a matter of fact, it seems to be skyrocketing.
Consider the behavior of central banks as the prices have fallen.
“Overall, gold prices coming down is giving an opportunity to various central banks across the world to improve on their holdings,” said Ajith Nivard Cabraal, governor of the Central Bank of Sri Lanka. “An opportunity that provides us with space to purchase a little more quantities and hold in our own reserves would be an interesting one.” (Source: Larkin, N., “Gold Drop Splits Central Banks as Sri Lanka Sees Opportunity,” Bloomberg, April 16, 2013, last accessed June 17, 2013.)
The central bank of South Korea holds a similar view. The decline in gold prices doesn’t affect its long-term plan for diversifying its reserves. (Source: Ibid.)
In the first quarter of 2013, the central banks continued to be net buyers. They purchased 109 tonnes of the metal, and have been purchasing more than 100 tonnes for seven consecutive quarters. (Source: “Global demand for gold jewellery up 12% in Q1 2013 driven by significant increases in India and China,” World Gold Council web site, May 16, 2013, last accessed June 17, 2013.)
On top of this, consumer demand is also strong. For example, take a look at India, the biggest consumer of gold. The demand for the precious metal has been skyrocketing in that country to the point where the central bank of India had to tell the local banks to not sell gold coins to retail customers. (Source: “India fin min says RBI has advised against selling gold coins,” Reuters, June 6, 2013.)
Instead of just selling their entire position on gold and running for the door, investors may want to consider reducing their exposure to the precious metal. Remember that investors need to adjust their portfolios according to market conditions; right now, it is evident that gold prices are performing well, so investors need to act accordingly.
With all this said, what I do see is that some of the gold miners are selling for deep discounts and have come under severe pressure. Investors should keep an eye on them, in case gold prices turn around and move higher.
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