More thoughts for Arabian gold investors

The past month has been a real test of nerves for gold investors, and some have thrown in the towel with prices dropping from $730 to $540 an ounce at once point, though they have recovered to around $580 at the time of writing.

This represents a retreat of 26%, a big swing downward and a nasty shock for the most recent buyers of the yellow metal. But this is also a repeat of the pattern seen in the 1970s during the last great gold bull market. For in 1975-77 gold pulled back by more than 40% before going on to its historic high of $830 an ounce in 1980, a level still not repeated since then.

If you examine the graphs and overlay the 1970s on to the 2000s then there is an uncanny resemblance to this pattern. It might be that at 26% down gold still has some room to fall, mainly due to a strengthening dollar, and therefore that even gold bulls should hold back a little.

Buy gold signal

Surely the signal to buy gold (assuming that the gold bull market is still intact - and where are the indicators that it is over, aside from the price fall?) is when we see any indication whatsoever of a change in policy from the Federal Reserve towards the US dollar and interest rates.

Not for nothing is the new chairman known as 'Helicopter Ben' on Wall Street, and should he decide to save US asset prices by inflating the money supply and devaluing the US dollar that is the moment to pile into gold.

Will this actually happen? Well, recent weakness in global equity prices and a softening US housing market are very real indications of actual problems for asset prices in the face of higher interest rate pressures. Drop the US dollar and the problem does not go away but it will be far easier for the global economy to digest.

Bull market still alive

So the bull market in gold is not dead, it is just resting. Economic realities are very much on the side of the yellow metal, and the fundamentals needed to push precious metals to much higher prices are all in place. Indeed, it is hard to see which other asset class can deliver out-performance in such an environment.

Thus Arabian investors who use the quieter summer months to stock up on large cap gold stocks, exchange traded funds, gold mutual funds, gold exploration juniors and even gold bullion and coins are unlikely to find themselves out-of-pocket this autumn, when investors in other asset classes may be in deep water.