Gold Crashes: 3 Reasons to Remain Bullish
Monday was an ugly day for gold as the price of the yellow metal fell over $30/oz. and suffered its largest one-day drop so far in 2014. My followers shouldn’t be in the least bit surprised, as Friday I wrote an article in which I argued that gold was getting overheated and that the market was approaching an intermediate resistance level around the $1,340/oz. range. Sure enough this resistance line held and those who held off on buying gold were rewarded with a decline to just over $1,300/oz.
But is the carnage over for gold?
Despite the fact that I am bullish in the long term I suspect that it isn’t, and there are a couple of reasons for this. First, the stock market is relatively strong. While I am bearish of the S&P 500 in the intermediate and longer terms, I think that the current uptrend can continue for a couple of months. When the Fed stops quantitative easing, the stock market will face a lot of selling pressure, but there is no need to panic-sell your stocks now. While smart money is likely looking for selling opportunities in stocks, I think a lot of money is going into the market, and this means that there is less money to go into gold.
Second, the geopolitical tensions in the Middle East and in Eastern Europe that have been drivers of the gold market this year are off the front pages. This doesn’t mean that they are no longer significant issues, and I suspect that we will see further political chaos in one or both of these regions in the coming months. But as there are no new developments investors in the West have largely forgotten about them. This is why the price of oil is falling, and I suspect that we can see gold fall as well.
Third, the banking concerns in Portugal have also left the front pages. Instead people are reading about Citigroup’s (NYSE:C) settlement with the Department of Justice, its “strong” earnings, and its stronger stock performance. Since one of the major drivers of gold buying is that it is a safe haven trade that doesn’t come with counterparty risk, and since this counterparty risk seems to have been mitigated, there is no apparent or immediate reason to buy gold.
But with these points in mind let me be clear that stocks are historically overvalued, and the risk of geopolitical tension and a banking crisis are relatively high. These are all reasons to be bullish of gold in the long run. For those who want to try to time the market the price has been in a narrowing range and it should find support around the $1,270/oz. level, although if it breaks through this don’t be surprised to see $1,200/oz. again. The best strategy for long term investors, however, is to simply dollar cost average, meaning that you should pick a date each month and a set amount of money and use that money on that date to buy however much gold you can. By doing this you buy more gold when the price is low and less when the price is high, and you take the emotion out of the trade.
Disclosure: Ben Kramer-Miller owns gold coins and shares in select gold mining companies.