Daily Gains Letter

Should Investors Be Worried the Gold Bullion Run is Over?

By for Daily Gains Letter |

180313_DL_zulfiqarAs the equities markets in the U.S. and around the world are reaching their all-time highs, there are speculations that gold bullion prices are in deep trouble. As a result, investors are fleeing the yellow shiny metal, or safe haven, for better opportunities.

Since the beginning of the year, gold bullion prices have gone down. In January, one ounce of gold bullion cost investors around $1,700. Now, the prices have dropped and now hover around the $1,550 region—that’s a decline of about eight percent.

Due to the selling, there are concerns that the bull market in gold bullion prices is over. Many investors are arguing that the global economic conditions are getting better and central banks are moving toward normalizing their monetary policies, so these factors may cause gold prices to fall.

Take a look at the stock chart for spot gold prices below.

dl_0318_image002Chart courtesy of www.StockCharts.com

Looking from a technical analysis point of view, while investors are focused on short-term price movement and selling, the long-term trend is still intact. If you observe the chart above, you will notice that gold bullion prices have been bucking the trend since the beginning of 2001, when gold was trading below $300.00 an ounce.

Since 2011, when the precious metal made its high, gold prices have been finding support around the $1,550 level. They have tested this area at least four times—and gold climbed higher each time.

Observing the fundamentals of gold bullion prices, they have seen a significant change—a good change, to say the least. Demand is still present and increasing from those who sold gold bullion.

Central banks, which used to be the net sellers of gold bullion, are actually buying. According to the World Gold Council (WGC), purchases by central banks around the world increased by 17% in 2012 compared to 2011—the highest level of buying since 1964. The central banks bought 534.6 tonnes of gold bullion. (Source: “2012 sees gold demand hit record value level,” World Gold Council web site, February 14, 2013, last accessed March 15, 2013.)

Starting in 2013, demand still looks exuberant. Central banks from countries like South Korea, Russia, and Kazakhstan are continuously purchasing the yellow metal. (Source: Park, S., “Korea Joins Russia, Kazakhstan in Boosting Gold Holdings,” Bloomberg, March 6, 2013.)

The central bank of South Korea added 20 metric tons of gold bullion to its holdings in February, while the central banks from Russia and Kazakhstan expanded their gold reserve for the fourth consecutive month in February. (Source: Ibid.)

With all this said, is the bull market in the gold bullion prices over? While the technical and the fundamental analysis show this is definitely not the case, investors should still practice caution.

As John Maynard Keynes said, “The market can stay irrational longer than you can stay solvent.” (Source: John Maynard Keynes web site, last accessed March 14, 2013.)

Gold bullion prices might just go down on nothing but irrational selling. As it stands, gold is holding its ground very well; but time will draw the overall picture. If investors continue to use proper money management techniques, then they can be protected if irrational selling does take place.

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