The Bull Market in Gold Remains Intact

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Simon Constable

Dec. 10, 2009, 12:01 a.m. EST · Recommend (1) · Post:

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By Simon Constable, Dow Jones Newswires

NEW YORK -- Don't be suckered into thinking the recent plunge in gold prices means a bubble has burst.

It's just too early to say if it's just a pop.

My bet: Bullion's bull market remains intact because the factors fueling the rally haven't disappeared.

Last Friday, the price of gold saw its biggest one-day drop since March 2008. It slid to $1,142.50 a troy ounce in London on Monday from an all-time high around $1,218.25 Thursday following Friday's modestly favorable employment news.

Reuters

That's a mere 6% blip in a year-to-date surge of approximately 31%.

"It is a correction in a long-term uptrend," says Jeffrey Nichols, senior economic adviser to Rosalind Capital. It's a trend he sees lasting "at least another couple of years."

Nichols' reasons: Loose monetary and fiscal policy that could lead to inflation, resurgent demand for the metal by central banks, increased investment interest from institutions and individuals, and declining worldwide mine output.

Two of the items worthy of further discussion: Investment demand and loose monetary policy.

Investment demand is important because although historically the majority of gold has been used for making jewelry, high gold prices are highly correlated with strong investment demand.

Gold prices have kept climbing but investors' enthusiasm is far from fading. What should individuals do? India bureau chief Paul Beckett speaks to personal finance reporter Shefali Anand about the issue.

A quick look at the bullion holdings of the SPDR Gold Shares exchange-traded fund /quotes/comstock/13*!gld/quotes/nls/gld (GLD 110.84, -0.11, -0.10%) shows investors weren't bailing last week. The fund only saw a drop of about 1.5 metric tons Friday. That's miniscule compared with the current total of approximately 1,130 tons.

On monetary expansion, James Turk, founder of GoldMoney.com, says, "The amount of new money created during the financial crisis has debased the dollar more rapidly than the gold price has risen."

So in his view there is still more upside. But none of this means that gold prices will go up in a straight line. In fact, prices could retreat quite substantially and still leave the uptrend intact.

So how low can it go before folks start to get worried?

A correction back to $1,000 wouldn't be crazy, explains John Roque, a technical analyst at WJB Capital Group in Manhattan, in a recent research report. Presumably, the uptrend could resume after a downward or sideways move, which gets me to my initial point: The truth is we'll have to wait and see.

Simon Constable is a Dow Jones Newswires columnist and host of the News Hub Web Show. This column first appeared on Dow Jones Newswires.

Not seeing much mention here on MW of the Moody's announcing on Tuesday of change in it's grading of U.S. and U.K. sovereign debt. Both are retaining their "AAA" rating for now, but within that rating, their classification has been changed from "resistant" to "resilient"...this is *not* a good sign for the dollar (much less the future of the Republic!), as it is a..."

- NoBama08 | 2:42 a.m. Today2:42 a.m. Dec. 10, 2009

Variety will charge readers for its online content. The move will highlight whether the entertainment publication is still relevant.

3:28 p.m. Dec. 9, 2009

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