Is now a good time to buy gold?

You believe this is one of the most challenging investment climates for precious metals over the past few years. What makes this so?
The last few years have been dominated by various factors, which taken together, have provided the basis for the rapid and ongoing rise of the gold price.

The banking crisis in 2008 led to an environment where central banks pumped large amounts of liquidity into the global markets. Interest rates were slashed and lending in the interbank market, as well as lending towards the corporate and private sector, were seriously impeded. This led to the search for alternative assets as the confidence in the fiat currencies began to wane. What followed seamlessly was the development of the sovereign debt crisis in Europe and the impasse in the United States about raising the debt ceiling, introduction of quantitative easing, etc.

This in turn, led to the first ever downgrade of US issued debt and the following massive rise in the gold price towards $1,926 per ounce was seen as a direct consequence of this serious loss of confidence in the two leading reserve currencies. Central banks, sovereign wealth funds, pension funds and the private investment community have been vying since the events for access to the gold market in an attempt to diversify their portfolio. Gold has established itself as an asset class in its own right during this time, helped by the low cost of funding gold long positions.

This investment environment for gold has started to shift very recently. The European sovereign debt crisis is out of the major headlines, at least at this moment in time.

The US economy, as a whole, has performed not as badly as feared; debt is still an issue but that might surface stronger in 2013 and some officials inside the US Federal Reserve Bank have indicated that interest rate rises in the US might be already be forthcoming in 2013. The potentially dissipating risk of the collapse of the financial markets, coupled with an end of extremely low interest rates, might make the case for holding and funding gold positions more challenging.

What caused the price of gold to fall below $1,600 late last year from a high above $1,900?
The profit taking seen during Q4 in 2011 has been strong and the selling did meet an already depleted physical market. A lot of financial institutions finished their financial year at the end of November 2011 and the incentive to book some unrealised profits into the year end was a great and understandable driver.

Gold still finished the year up 10%. The openly discussed need for commodity indexes rebalancing, to be undertaken in the first two weeks of January 2012, also played a role in developing a short term bearish sentiment in the market.

We all know what eventually happened, when the market was caught short in January 2012 and the selling for the rebalancing need was used to cover some of the significant short position, existing at that time, in the market. Gold rallied from $1,530 to $1,750 in January.

Has the price drop made it a good time to buy gold?
The gold price is currently trying to consolidate above $ 1600 an ounce. Physical buying in the world's major market is slow. A positive sign is the build-up of short positions in the futures markets which could lead to short covering rallies, if the current levels be confirmed and are holding.

Emirates NBD advocates a five to ten per cent share of gold in a prudently managed portfolio and the current gold price constitutes no hurdle in order to fulfil this requirement.

What types of things should buyers look out for that might signal an impending rise in the price of gold?
Potential investors should firstly and most importantly identify their reasons for purchasing gold (portfolio diversification). The gold price might react very suddenly to new geopolitical threats, significant shifts in global economic expectations and also to potentially correlating currency moves (traditionally the US dollar).

These macro signs, coupled with the individual risk profile of each investor, will give each individual their own "signal" if and when to buy gold.