For a short bit Tuesday, gold slid 2% to below the $1600 mark. The drop marks an 8-month low for the yellow metal.
Silver too was beaten by day’s end. As of 5:00 PM Eastern on Tuesday, it was down to just below $29.50.
Even though it seems gold has been stuck in a rut here lately, it is still up around 5% year-to-date.
But this latest dip below the $1600 mark can understandably be cause for concern. According to a Reuters piece outlining the market’s moves and recent political developments, a slide in the Euro is causing gold priced in dollars (…the primary pricing denomination) to take a hit.
Many investors fled to the U.S. Dollar “…as a means of reducing risk, especially in light of recent U.S. data that suggests recovery is taking hold in the world’s largest economy.”
This scenario, which has occurred before, puts downward pressure on gold priced in U.S. Dollars.
Daniel Smith, an analyst at Standard Chartered, said “What we’ve seen in recent weeks is rallies have been increasingly weaker on the upside, and that is a warning that we are going to see another test on the downside.”
Although demand from China and India remains strong, it’s had little impact in supporting prices over the last couple of weeks. This strong demand though certainly reinforces analysts’ expectation that over the long-term, gold will benefit from increased demand from Asia.
Although the sentiment on gold right now seems bleak, it nothing too dissimilar from earlier in the year in January according to analyst James Turk, who believes we should be seeing a bottom in gold really soon.
The slide in the Euro (…and drop in gold) is a natural response to the outcome of the latest elections in France, Greece and elsewhere according to Turk and other analysts. Austerity measures to reign in government finances have largely been ineffective and highly unpopular. Results from the election indicate that austerity may either be scrapped altogether or severely scaled back. Much of that depends on the EU’s largest member, Germany.
If inflationary policies are pursued though, the result will be the same – more inflation (i.e. increasing the money supply to increase “liquidity) makes gold a very attractive, safe-haven investment.
Turk believes we may be on the cusp of another round in the European banking/financial crisis, and that will prove very bullish for gold.
While we can’t offer investment “advice” or predict the future, we feel the $1600 price level represents a great buying opportunity for gold bullion. Like Turk, we feel that gold is either at or close to its bottom. We’ll see as we go into the summer and how events in Europe and here in the U.S. unfold.
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