Last Chance Saloon for Gold Investors to Jump In?

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"Buy on weakness is the cry—again!"

Some analysts see the annual hiatus in gold investment during the summer, coupled with unwarranted strength in the U.S. dollar, as providing the last major chance for gold investors to buy at 'reasonable' prices before a big surge in the gold price later in the year. Buy on weakness is the cry—again!

If we look at the logic behind the arguments, there seems to be a case. Take dollar strength, against which the gold price typically falls when the greenback moves upwards. The argument is that the unprecedented growth in U.S. money supply will ultimately lead to serious inflation. And gold is seen as benefiting strongly in an inflationary environment. Some believe that the U.S.'s current account deficits will lead to a major dollar decline against other key currencies, and this too will put upwards pressure on gold.

Conversely, fundamentalists reckon that gold is vulnerable due to falling industrial (jewelry) demand. This has been coupled with a steep drop in jewelry sales in the recession-hit West and a big increase in scrap coming onto the market. Despite these factors, the gold price has managed to remain relatively high, due to investment demand—notably in ETFs and bullion purchases.

All in all it is not unreasonable to see gold continuing its climb later in the year, even if stuttering a little currently. If and when it does breach $1,000, the psychology that had seen the mark as a barrier will likely turn to give the metal price a sharp boost. As the global impact of quantitative easing—not only by the U.S., but also in many other areas—takes effect, inflation is likely to return globally. Those suggesting hyperinflation and huge gold price increases as a result will, we sincerely hope, be confounded as the results would be too horrendous to contemplate on a global scale, and lead to all kinds of disastrous political consequences—wars even.

Thus any period of weakness now in the gold price may well provide a buying opportunity. Sooner or later, we feel, the $1,000 barrier will be breached and, once through that, it may well stay there for the foreseeable future.

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