Gold up $17/oz to $931/oz

The recent sell-off of gold highlights the volatility of the commodities sector. Investors should keep this in mind when they trade leverage investment types. They should also not avoid such risks, rather they should manage them. Out of such calamity comes great opportunities. Such falls tend to leave trepidation in the minds of investors, but actually these are often the best entry points, particularly for your leveraged investments. Of course we need to look for support indicators.

There is no question in my mind that this was a profit-taking sell-off. I have seen arguments made that the gold sell-off was caused by the liquidation of the gold position of Bear Stearns. I think that is a pack of nonsense. An attempt by some analyst to have a 'profound thought' to get published. Why? Because the smoke has yet settle on the Bear Stearns case. You could argue that the sell off was precipitated by a market awareness that Bear Stearns had long exposure to gold. Regardless I dont think JP MorganChase would be in a hurry to liquidate this holding. Its one of the best asset classes to hold.

The gold price has fallen through the $950/oz support that I saw as support, so it now looks like holding a lower support. Regardless that just makes this a better buying opportunity. I retain my belief that gold is going over $US2,000/oz. In the coming week I will update my model for the gold price outlook.
You might ask what could actually cause the gold price to fall back to the next support at $US850/oz. I suggest talk of central banks selling off their gold reserves. I dont think that is likely since the international monetary system is likely to come under scrutiny in future years and central banks will not want to be holding an empty draw. Another factor might be a decision by the Fed to aggressively raise interest rates based on an inflationary outlook. Again I think recent action and statements by the Fed dont support that possibility. It is my belief in fact that if a bank like Bear Stearns is going to fail, gold is more likely to go up because monetary assets are going up, and the bank fails because they are short on gold, not long. One would have to conclude that Bear Stearns failed inspite of their gold holdings, not because of them.

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Andrew Sheldon www.sheldonthinks.com