Despite a pullback in gold prices, hold on to your gold. In fact, look to buy more.
You see, thanks to record highs for the U.S. stock market, a notable shift from defensive assets to “risk-on” trades has occurred.
The yellow metal slumped 1.4% to $1,552.80 Wednesday marking a nine-month low. That’s after gold prices slid below $1,600 an ounce in Q1 on hints of a global economic rebound. The slide prompted market participants to shed gold holdings.
It’s “certainly understandable” for investors to have sold gold following a 400% appreciation over the last decade and move into stocks, said Malcolm Burne, chairman of the Golden Prospect Precious Metals investment trust.
But, here’s why the tide may be about to turn.
Gold Prices Chart Shows Breakout Ahead
If you look at a chart of gold prices over the past 12 years, you’ll see we’re due for a new breakout.
Gold has been going through consolidation pattern since October of last year when it traded around $1,800 an ounce. The phase is similar to the kind of move the metal made in 2006-2007.
Gold prices hit $725 an ounce in May 2006, and then fell back to around $600 an ounce by September. After trading between $600 and $675 an ounce through September 2007, gold prices jumped to $833.75 by the end of the year – a 24% jump in three months.
The same scenario is emerging.
After hitting $1,900 an ounce in September 2011, gold prices slipped back to around $1,600 by the end of the year. Gold’s been trading between $1,550 an ounce and $1,800 an ounce for about a year.
Another jump like in 2007 would take prices to about $1,970 an ounce in the coming months.
And when the latest round of selling is done, this price climb could start.
“[O]nce the sellers and profit takers have been shaken out fully, the arguments for a new revival upwards are more solidly in place than ever,” Golden Prospect’s Burne maintained.
Investing in Gold
The above price chart is just part of the reason the case for investing in gold remains compelling.
“Fundamentally, I think the story for gold is still there,” Financial Alliance director Sani Hamid told CNBC in an April 2 interview. “When the world starts to chug up again and the Indian middle class, the Chinese middle class coming up again, that story will come back to the forefront and then I think gold will do well. So I think gold is not a short term story at this particular point, but I think if you have a slightly longer horizon…12, 18, 24 months-I think it will be a good bet.”
Nothing draws buyers to gold more than inflation – which the Fed runs the risk of with continued monetary easy – and currency devaluation. The other fundamentals for investing in gold include record-low interest rates and a swollen balance sheet at the U.S. Federal Reserve.
In addition, demand from central banks continues to be strong.
After 20 years on the sell side, central banks became net buyers of the metal in 2011, a trend that has continued in 2013. In the first two months of this year, central banks bought more than 1.9 million ounces, or some $3 billion, of gold.
Finally, the banking crisis in Cyprus overwhelmingly highlights why savers and investors the world over should be bulking gold stores.
In fact, Money Morning Global Resources Specialist Peter Krauth recently outlined how the Cypriot banking crisis is a major reason to be investing in gold. Don’t miss his analysis here.
By DIANE ALTER, Contributing Writer, Money Morning
April 4, 2013