Buying The Dips In Gold Has Been The Right Move For A Decade

According to the author of this article, buying gold when there is a price dip has always been the smartest move over the past decade and this year is no different. Gold prices usually see a correction in March and right now is the best time for investors to buy gold before prices go up again.

Frank Holmes, Contributor
4/10/2012 @ 8:31AM
Forbes

Although the yellow metal has been on a spectacular 11-year bull run, recent strength in the economy–or at least the rising likelihood that the Fed will not be as loose in its creation of liquidity–has some investors thinking gold’s heyday is over.

Throughout gold’s decade-long rise, price action over the short-term has gone both ways. It helps to look at what has happened after short-term drops. Looking at the past decade of one-day 5 percent declines in gold, you can see that this event is pretty rare. In 2006, gold dropped more than 5 percent in a day only two times. In 2008, there were three such events. Another one occurred at the end of this February.

The 5 percent drop in the SPDR Gold Trust (GLD) since February 28 shouldn’t surprise gold investors given the seasonal pattern for gold. Whereas gold rises nearly 2 percent in both January and February, over the past 11 years, it’s been a non-event for gold to correct in March.

In addition, it’s a good reminder that bullion has historically been less volatile than the stock market: the 12-month rolling volatility over the past 10 years for gold was 13 percent. For the S&P 500 Index, the 12-month rolling volatility over the same period was 19 percent.

This March, there seemed to be one main driver eight thousand miles away negatively affecting gold prices. I often say that government policy is a precursor to change, and fiscal policy strongly affected the Love Trade in India last month. To trim its current account deficit, India’s finance minister proposed doubling the customs tax on the precious metal. It was soon reported that jewelers closed shops in protest.

As a result, gold imports into the world’s largest gold market fell 55 percent.

It’s not the customs tax that has the gold shops boycotting, says UBS Investment Research firm. Jewelers’ “prime gripe is with the new 1 percent excise duty on unbranded jewelry” leading to a greater recording of gold transactions, which means more regulation and red tape. What’s so egregious to jewelers is the excise tax will be retroactive so those shop owners holding old gold stocks will have to pay duty on those as well, says UBS.

I believe this is only a temporary sell-off for India. As I often discuss in my presentations, traditional festivals and holidays drive gold demand in India because of their strong history with gold. With their love for the yellow metal, Indians hold the belief that gold “will perpetually rise,” although there are certain buyers that wait for a “psychologically important $1,600 level,” keeping in mind the strength of the rupee, says UBS.

While the seasonal Love Trade period for gold generally falls between August and February, an important holiday is coming up which has historically driven higher sales of gold. Akshaya Tritiya festival occurs on April 24 this year. This is an important occasion for Hindus, celebrated annually in late April or early May, depending on the Hindu calendar. Buying and wearing of gold jewelry is important on this day, as UBS says it’s one of the two “biggest gold buying events” in the Hindu calendar. The second event is Dhanteras, which occurs during the peak seasonality period for the yellow metal.

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