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Will Gold Keep Falling?

Analysts Abandon Talk of a Bottom

Written by Brian Hicks
Posted December 17, 2013

Warren Buffett likes to tell his followers to buy when no one else wants to – and right now, no one wants to buy gold.

The precious metal keeps going down, and analysts are no longer predicting whether or not it’s hit bottom. They don't want to risk losing the trust of those that follow them, and they're starting to think gold's decline won't stop.

gold bearBut Warren Buffett’s advice signals that right now is a good time to buy gold. So many investors and analysts believe gold should be avoided that they are selling it off like it has no hope of recovery.

But is there hope for recovery?

Of course there is. Gold always comes back up, and if you compare historical lows to now, gold really hasn’t slumped that badly.

This same type of drop happened back in the '70s, showing us that this is a pattern for the gold bull market. The only difference is that in the '70s, it really took a nosedive – but it didn't last as long. Gold’s slump now has been going on for most of the year, while the slump in the '70s recovered much faster.

Gold's Track Record

Let’s take a moment to look at the last couple of years. In 2011, gold peaked at $1,900, making a lot of investors happy. But over just two years, it fell 40% to $1,200 an ounce. It bounced back up quickly with a two month rally before going back down again, but at least it stayed above the $1,200 we saw in June. On Friday, gold hit $1,235.70.

Looking at this, we see that while gold did bounce from this summer's low of $1200, it also went back down. Now investors are worried that this $1,235.70 from Friday will again fall to $1,200... or even lower.

It doesn’t help that supply is not working with the price of gold. Gold miners increased production in the third quarter, producing 4% more gold than they were last year, when prices were at their highest. How does that make sense? The more gold that’s produced, the lower prices will fall because of its abundance.

Demand isn’t helping the situation either. India is the world’s biggest gold market, and it isn't buying as much as usual. The Indian government is partly at fault, as it raised excise duties and import payment restrictions. Because of this, gold demand went down 32%, and it’s expected to keep going down. Five years ago, India’s gold demand was 38% of gold consumption, but now it’s only at 21%.

In addition, if the dollar goes up, investors will continue to walk away from gold to benefit from better stocks. As for commodities, investors are starting to favor other metals like copper more now.

Waiting for a Bottom

The light at the end of the tunnel is that gold might actually be approaching a bottom now that most of the bulls are gone. Contrarian investors may start buying gold even with the risk of the price going lower. Those investors will be attracted to gold because of the sell-off.

Everyone is just waiting for the bottom. Every time gold inches down, everyone speculates that it may have hit bottom.

The truth of the matter is that at some point, it really will hit bottom. That might be at $1,200 or even $1,100. Is this to say that it is still on the downward spiral?

I don’t have a crystal ball... and neither do any other analysts out there. But with the economy strengthening, people are not looking for a safe haven investment. Gold has always been that one investment people want to buy when times get tough.

Right now is not one of those times.

Unemployment is going down, the dollar’s value will rise when the Fed tapers, and job creation continues to rise. People have money now, and they want to take more risks with their investments, which is what is going to make them pour their money into the stock market and other commodities besides gold.

Is that to say you shouldn’t invest in gold? No, not at all. Gold is cheap right now. But if you buy into it now, know that it’s for the longer term. You’ll have to wait a bit before you’ll see a return that will make you happy...

But that return will come.

 

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