Looking at Long-Term Gold

Luke Burgess

Updated July 18, 2006

BALTIMORE, MD — Gold has dipped nearly $40 an ounce in two days! But are we concerned? Not a chance pal. Gold’s long-term fundamentals are positive and we remain as bullish as ever.

August gold futures dropped over $20 today as investors take profits and the U.S. dollar continued its ascent.

The dollar enjoyed a nice little boost this week after data was released showing an up tick in U.S. producer prices in June. The greenback was also bumped up after figures showed the U.S. attracted $69.6 billion of capital inflows in May. This was above economists’ forecasts and more than enough to cover that month’s trade deficit of $63.8 billion.

The dollar index managed to strike a 20+ day high of 86.93 earlier this morning. Take a look:

The two-day bump in the dollar index has put downward pressure on gold prices. August gold closed very near its intraday lows at $629.50 an ounce today on the NYMEX, giving up 5.8% for the week.

This week’s drop is also the result of profit-taking.

Last week we saw sharp gains in the yellow metal driven by fighting in the Middle East, deadly train bombings in India and the defiance of Iran and North Korea in the face of western efforts to curb their nuclear programs.

Gold prices increased 5.7% last week and have swelled 15.2% since hitting 2+ month low of $546.40 an ounce on June 14th.

And with violence between Israel and Lebanon continuing to claim lives and wreak destruction, safe-haven demand for the precious metal is likely to remain strong.

Aside from all the brouhaha in the Middle East and elsewhere, gold’s fundamentals are bullish. Take a look at the chart below or click on it for a larger image.

What we’re looking at here is a trend line that shows an obvious uptrend in prices. You can also see how much gold was over-bought back in April and May. Additionally you can see gold’s over-bought standing last week. But the trend is clear: Bullish.

When creating this chart I made sure to keep the trend line very conservative. So we can assume gold will certainly be back to its $700 range within a few months.

In the meantime I suggest slowly acquiring physical gold on any heavy weakness. On the equity side of investing I think the time to buy in quickly passing. Don’t get me wrong, there are still many deals to be had. But this won’t last.

– Luke Burgess

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