Let's cut to the chase: we do not think the drop in gold earlier this week marks the end of this bull market. Why did gold drop? First, I think it's fair to say that, technically, gold was looking increasingly vulnerable over the past several weeks. Many new-time buyers were getting nervous. Against that background, it did not take much for gold to fall.
Interest rate talk again
The "collapse" in the gold price has been attributed to hawkish comments from Fed officials. This contributed to the negative sentiment, but in reality it is much sound and fury, signifying nothing. These two Fed officials are well known to be hawkish, and the market was in any event already expecting a rate increase before the end of the year. This was nothing new. Moreover, William Dudley, president of the influential New York Fed, had the day previous urged caution in raising rates. Why did not that have a positive effect on gold? Because the sentiment had shifted.
Equally important, I believe, was the rally in the dollar, only partially attributable to the Fed comments. The British pound fell sharply again (following a "hard-Brexit" talk by the Prime Minister), as did the yen, on concerns about the efficacy of the National Bank's policies.
Stay the course; it's early days yet
The fundamentals remain intact. Monetary and interest rate policy remain very loose around the world, and that would remain true after the Fed increases the Fed Funds rate another one-quarter percent. Last year, gold fell sharply into the expected rate increase, and dropped further when the cut was announced, then immediately reversed and moved up. The same could occur this year. One quarter point does not stop the gold bull market.
The bull has not ended. Over the past couple of decades, when gold stocks turn, they typically move 150% to 300%. What we have seen so far this year would be one of the shallowest and shortest up-moves of the past 30 years. So we continue to hold and would add to positions. After a dramatic fall such as we saw earlier in the week, one should not expect gold to immediately reverse and go back to where it had traded. It may take a little while to settle down (though with the U.S. election approaching, that may not be too long). So we would buy on extreme weakness, place below-market orders, and look for good opportunities to buy.
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