Can gold keep its lustre?

The IMF is warning of a new 1930s-style depression. There is no end to the euorzone debt debacle in sight. And global economic growth is under severe strain. Even China is buckling. Logically, gold should still be holding its own. But it's not. Mid-week, the yellow metal was trading at a near two and a half-month low. What's going on with gold?



Jitters

Part of the problem is that when the economic news turns especially bad, cash is king, hence some selling off. There's also strong currency trade-winds gusting about: a strengthened dollar will see less demand for the metal. And if the US dollar strengthens further then it will beat down gold prices further.

Some gold investors may panic slightly and head for the exits. If they've been long-term buy-and-hold investors, they will have had a spectacular run. Roll back to 1999 and gold was selling at $250 an ounce. Today, it's still selling for almost $1600 (down from its recent $1900 peak). But the case for gold still appear solid, as we've outlined.

Why own gold?

If the gold price does drop further, then investor sentiment may have structurally changed. Yet we've seen nothing fundamentally change with the world's biggest economy. Spending cuts are still the order of the day, just about everywhere, from Washington to Madrid to London.

Gold, in itself, is not actually worth that much. It's not like a property you can make an income from, or use for physical shelter. You can't eat it and it's not easy to carry around, safely at least. But that is missing about the point about gold. It should only be used as a hedge, rather than serving as a major component of an investment strategy.

Hold your nerve

Some professional investors, including George Soros, have already substantially sold down their holdings. (Many would not want to bet against Soros.) So if you own gold or gold shares, you might want to consider just why you do own this commodity. Long-term gold bugs should be used to market corrections.

Given the state of the global economy, the recent sell-off may be a buying opportunity. The fundamentals, it bears repeating, haven't changed one bit.
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