Why the dip in the gold price is a buying opportunity

published 27 June 2006

Metals got off to a flying start in 2006. But they have fallen somewhat in the last week. Gold slumped to just $541 on Wednesday, more than 5% off its high of $574.60 at the beginning of last month; platinum dropped below its $1,000 per ounce level; and silver is 6.5% off its January high.

So what's going on? asks Adrian Ash on Dailyreckoning.co.uk. "Is the trade of the decade taking a breather or has it quit the field?"

It's a breather, says Bill Bonner, also on Dailyreckoning.co.uk. The main factor behind gold's fall last week was the threat that Japanese interest rates might start to rise from their 0% level. Large amounts of gold are bought in yen borrowed at very low rates, so any suggestion of a rise makes dealers rush to close their positions. The other metals then followed gold down as investors fretted that the bull market in the metals sector might be coming to an end.

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But it isn't. "It's a weak bull market that doesn't have strong corrections," says Bonner, who thinks that gold could fall all the way back to $500 before resuming its upwards path.

Analyst David Fuller agrees that the last week's trading represents no more than a blip. As he points out on Fullermoney.com, in a world where central banks can, and do, print trillions of new dollars, euros, yen, and so forth every day, any long-term store of value (such as gold) can only be a good thing to hold. The fundamentals of the market are still just as they were, so ignore the bears and "buy gold on dips", says Bonner.

Annunziata was a deputy editor at MoneyWeek, covering financial markets, politics, economics and comment pieces. She then went on to the Daily Telegraph as a lead writer where she wrote a column on young women’s financial issues. She was briefly a member of the European Parliament for the East Midlands region in the UK as part of the Conservative Party. Annunziata continues to write as a freelance journalist.