Gold has significantly increased in price over the last year, but in the last week, the price has tumbled.  Is this a change in trend, or a buying opportunity?

For all of recorded history, gold has been a store of value.  “Money” is created by decree, by increasing the money supply, government borrowings, reducing official interest rates or bailing out troubled financial institutions but gold is rare and in limited supply.

The US economy has been troubled due to the war in Iraq and the consequent drain on the economy.  The Federal Reserve is currently trying to prevent a recession through interest rates.  The long term trend of the US dollar is downward.  This means that the value of gold in US dollars has increased.  Since it is a safe store of value, demand for gold rather than US dollars has increased the price of gold, even in strong currencies.

We’ve seen some dramatic events over the last few days with the bailout of Bear Stearns and commodity price falls across the board.  These have reduced the price of gold from $1,033 per ounce to the current figure of $919 per ounce.  Oil and base metals have also dropped in price.  Why is this?

My take is that hot money has suddenly moved into other areas, taking profits on gold, and I have also read that some parties holding large amounts of gold, oil and base metals have had to sell their holdings to cover losses elsewhere.  Both actions push the gold price down.

However, the fundamental issues that have lead to the gold price boom are unchanged.  Hidden inflation and devaluation of money are still there.  Gold still represents a store of value, despite its volatility.  Long term, I am still bullish on gold.

Investors should look at dollar cost averaging into gold, thereby acquiring more at lower prices, and less at higher prices.  Traders should look for short term trend changes on the long side, since I believe that prices will recover. Traders should also filter out non-trend related price volatility, and I believe that the recent moves are just that.

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Tags: Commodities, Futures Trading, gold

This entry was posted on Saturday, March 22nd, 2008 at 1:45 am and is filed under Commodities. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.