Last week's 6% drop in gold prices triggered a global bloodbath that handed
many investors their lunch and gobbled up any extra Christmas spending money.
But despite the pain and suffering caused by the gold selloff, there still are a
number of reasons to believe it is too early to write off gold completely. In
fact, the recent selloff might offer an excellent buying opportunity. Click to
Enlarge First, let us take a look at how gold performed last week: not good.
Actual gold prices dropped approximately 6%, and gold ETFs such as the SPDR Gold
Trust (NYSE: GLD ) and iShares Gold Trust (NYSE: IAU ) dropped in similar
fashion. The chart illustrates this dramatic carnage. So, as gold flattens at
the bottom of the ravine, I am here to speculate that it is simply too early to
underestimate gold for the long term because structural and fundamental elements
point to stronger gold prices ahead. Here are nine factors to consider: Federal
Reserve Chairman Ben Bernanke & Co. stand ready with the printing presses if the
U.S. economy slows or things blow up in Europe. Gold's decline last week was
directly related to the Fed's inaction, and it's easy to foresee a scenario
in early 2012 where the Fed would embark on QE3. A recession in Europe and a
marked slowdown in China will most likely ripple onto our shores with slower
domestic growth, and any action in this direction would be a boost to gold
because the first choice of central bankers worldwide is to crank up their
printing presses to stave off economic slowdown or collapse. A European collapse
would have potentially far-reaching and disastrous implications. Things
definitely are not going well for "Team Merkozy," and if the region doesnt
get its fiscal house in order to investors' liking, the entire euro zone could
crumble and gold would become a "safe haven" as it usually does during times
of financial stress and uncertainty. Watch for more action by the International
Monetary Fund and the European Central Bank to save the euro, and this, too,
should have positive implications for gold. The Congressional supercommittee
couldn't even find a measly trillion dollars in cuts and so it's obvious
that the U.S. Congress has no stomach for real and meaningful deficit reduction
. This means that over the long term, the value of the U.S. dollar will likely
continue to decline, which is bullish for gold. Sovereign nations around the
world are becoming large buyers of gold. In the third quarter, central banks
bought almost 150 metric tons of gold, up from last year's level of 22 metric
tons. Central banks became net buyers of gold in 2009 after having been net
sellers for almost 20 years. Central bank purchases came in seven times higher
in Q3 than the previous year. Chinese demand for gold is increasing, both on the
official level and in the form of jewelry, as Chinese jewelry purchases now
exceed India's. Gold has had a number of 10%-plus corrections over the past 10
years; however, it has enjoyed 10 consecutive years of gains. December is a
seasonal low, slow time for gold as commodity funds and hedge funds wind down
for the year. Gold analysts at major banks like UBS, Goldman Sachs and Barclays
Capital all forecast gold prices in the $1,800-$2,000 range for 2012. So, for
now, gold is in a bear market and technical indicators remain negative. However,
with central banks on the move, increasing demand from central banks and jewelry
buyers, ongoing uncertainty in Europe and feeble attempts at deficit reduction
at home, fundamentals point toward the likelihood that gold could gleam again.
Disclaimer: Wall Street Sector Selector actively trades a wide range of
exchange-traded funds, and positions can change at any time.
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