'Buy-the-dip opportunity'
in progress
By Craig R. Smith, CEO Swiss America
May 1, 2008
The recent pullback in the price
of gold has sparked a slew of inquires as to just what precipitated
the drop and if this is the end of the bull market in gold. The
following is my analysis of the current market activity and
prospects for gold's future.
There have been five prior
'corrections' to the current long-term secular bull market
in gold that began in 2001:
1. 2003 - Gold at $382 dropped to $319 for a 16% correction
2. 2004 - Gold at $425 dropped to $375 for a
13% correction
3. 2005 - Gold at $536 dropped to $489 for a
9% correction
4. 2006 - Gold at $725 dropped to $560 for a
22% correction
5. 2007 - Gold at $841 dropped to $778 for
an 8% correction
Correction #6, from a March 17th high of
$1002 to a low of $852 on May 1st, is 15% so far. Therefore, if
this market follows its past moves, the next up-move for gold will
take prices to between $1,175 and $1,485 before another major
correction.
After each correction the analysts on Wall Street
were claiming the bubble in gold had burst and lower prices would
be seen in subsequent years. Obviously they were wrong five times
in a row.
Firm long-term
fundamentals
Secular bull markets in commodities tend to have a life of 15 to 20
years. I see the current gold market no differently. Even if gold
simply adjusts for inflation we should see $2156. While there may
be more volatility and wider price swings in this market, it has
been seven years in the making. It is very different from the rapid
run up and run down we experienced in 1979-80. Therefore
comparisons to 1980 are not valid.
The fundamentals for higher gold are firmly in
place:
-Increasing budget and trade deficits
-Higher oil and food costs
-Increased cost of living
-Artificially low interest rates which result in a softer
dollar
And this does not even take into consideration the
consequences of another terrorist attack or escalated tensions in
the Middle East.
Further deterioration in the equity and credit
markets could spark a flight to safety as investors have already
experienced the Fed's willingness to inflate to avoid a
collapse of America's banking system. Inflating to save
financial institutions has a bad side effect...Inflation!
In this recent drop we saw traders booking profits
at the end of the first quarter of 2008 from one of the only
profitable trades on Wall Street in the last six months: GOLD! End
of quarter sell-offs in commodities are very common and this
quarter was no exception.
Conversely equity markets often rally. Many
institutional investors and pension funds will overweight their
portfolio with equities and 'paint the tape', engaging in
window dressing.
Not too late to discover great
values
So if you are long gold stay long. If you
haven't participated in the greatest gold bull ever, it is not
too late. This recent pullback should be no different than any
other and represents a great opportunity.
I see the greatest value in the gold market today
in early American $20 gold coins and gold commemorative coins.
These markets have not experienced the same growth as gold bullion
yet held very well during this correction. That is a clear sign
this area of the gold market has incredible strength and is overdue
for a big increase.
Expect to see more and more recommendations from
many experts on the numismatic gold market. Numismatic gold offers
unique privacy, portability and tax advantages not offered with
gold bullion.
