3 Reasons to Consider Buying Gold on Recent Weakness

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Today gold is down a massive 2.8% to $1285 per ounce. This steep drop wipes out the gains that had been had in the previous five sessions. But should you consider buying this weakness? There are multiple reasons why gold is a good buy for both a short-term trade and long-term investment.

The Fed’s Dovish Policies

Gold will have support on dovish comments from Federal Reserve Chair Janet Yellen that she has given during recent speeches, specifically the pledge to keep the environment friendly for growth. Remember that gold plunged following Yellen’s recent suggestion that within six months rates could be increased following the finishing of its quantitative easing program. However, with recent data still not up to par, Fed policy will remain highly accommodating to support continued improvements in the U.S. labor market. This will translate to selling of the US dollar and a longer term devaluation of U.S. currency which is bullish for gold.

Inflation is Good and Bad For Gold

Recent inflation numbers have been creeping up as well across the globe. While still not enough to give gold a lift at this point, upcoming U.S. data could spark buying, particularly if we see a continued significant deviation from expectations. One of the problems with gold (and all precious metals for that matter) is that they are generally a hedge against inflation. Inflation however has been absent for some time. Consistently low levels of inflation and results from data releases meeting expectations have kept the lid on gold prices. It is a fine line however. Gold buyers want to see an increase in inflation, which helps gold, but a severe rise in inflation could result in the Fed changing course to support the U.S. dollar which is bearish for gold.

Chinese Demand

A recent report was released citing that China’s annual demand for gold could jump around 20 to 30 percent by 2017. This type of demand will lift prices. One of the primary reasons cited for increased demand is that China’s wealthy population continues to grow and seeks both new ways to make money and ways to protect their assets. The World Gold Council believes this trend of Chinese buying will continue after China became the world’s largest gold-consuming nation in 2013. For the first time in years, China knocked India off as the top country for gold demand. While demand in India is still at unprecedented levels, recent government tariffs and restrictions have slowed the growth in demand..

Annual demand for gold in the form of jewelry, coins, and bars is set to hit at least 1,350 tons by 2017. This is significant as it represents growth of almost 20 percent of the country’s record consumption of 1,132 tons last year. Note that the report says demand will be at least 1,350 tons; it may very well be more. Given the sell-off over the last two years from the $1800 per ounce levels, demand has ramped up. Global demand in 2013 for gold in jewelry grew to its highest for 16 years as consumers in Asia and the Middle East scrambled to take advantage of the lower prices. This trend is expected to continue.

Conclusion

Gold is still up about $100 from the pre-Ukraine/Russian crisis over Crimea. That world issue drove stock prices lower and metal prices up. While the tension continues, it seems stocks are beginning to regain footing over the last few sessions while gold is now on sale thanks to a $50 per-ounce drop over night. Given the trajectory of gold prices in the last 20 years, the increasing global demand, record demand growth coming from China, and dovish policies by the U.S. Federal Reserve, I believe that allocating assets to gold is a logical move for your portfolio

Disclosure: Christopher F. Davis is long physical gold and silver coins and bullion. He also owns shares of Vista Gold (NYSE:VGZ), Goldcorp (NYSE:GG) and Sandstorm Gold (NYSE:SAND).

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