Sell off for Gold based on faulty logic

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Sell off for Gold based on faulty logic

Throughout 2013, and especially over the last few weeks of the year, investment markets have watched gold sell off. The reason for this fall in gold, logic has it, is that with the US economy growing more strongly and the Fed cutting back on its Quantitative Easing (QE) program the need to own gold is fading.

Money printing leads to inflation

The QE program is money printing, and this is inflationary. So what if the Fed has cut $10 billion from its QE program each month – that still leaves $75 billion being printed each and every single month. That’s a whole lot of inflation being stored up for the future.

It’s not only in America, either. Governments around the world are targeting higher inflation as a way to reduce their relative debt levels and swing their economies back to growth. In Japan this policy has been termed ‘Abenomics’ after the President who introduced it: and it’s working – Japan has rapidly rising inflation after years of deflation.

Everywhere you look, central banks are printing money in attempts to increase the money supply and grow the economy. This supply of currency is pushing asset prices to an all-time high. And when inflation is rising and interest rates are low, the one place you can’t put your money is in cash.

Targeting inflation will be good for gold

The Fed wants inflation to rise. That’s why, in conjunction with it lifting its foot off the QE pedal, it said it will introduce other monetary easing policies. It won’t be raising interest rates until inflation has reached 2.5%, for example. That’s not predicted to happen until 2016. So expect the Fed to be inflation accommodative for at least another 12 to 18 months.

I cannot remember a time when inflation was not good for gold.

Let’s not forget supply and demand

When the gold price falls, gold mining companies back away from production. Their current focus is on the most profitable mines and they have begun to cut back on expansion. Over the next few years that will mean the amount of gold available reduces significantly, at exactly the time the world’s central banks have begun stockpiling.

In fact 2012 and 2013 saw the largest purchases of gold by central banks on record. China looks to be exchanging paper assets for gold and silver.

Take advantage of short term weakness

This gold sell off holds no water when you examine gold logic. Enormous sums of money are being printed, central banks are hoarding gold, policy makers are targeting inflation, and gold supply is set to drop. Faulty logic has led to a weakness in gold. Short term price weakness always presents opportunity. When the fundamentals haven’t changed then it’s time to begin taking a leaf out of China’s book and start buying gold again.

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