Buy Gold on Weakness

March 18, 2009 | By: FP Trading Desk

It seems that investors are buying gold for the wrong reasons. Reduced safe-haven buying for gold has seen the precious metals fall below US$900 per ounce Wednesday on announcement that the US Federal Reserve Bank will begin buying US Treasuries. Gold could possibly retreat toward US$700 per ounce, last visited in November, as investors once again develop a misguided confidence in the market. Investors should accumulate gold on near term weakness.

Investors are wise to accumulate gold on weakness over the next year to hedge portfolios against inflation and widespread currency debasement. Central banks around the world are undertaking huge levels of quantitative easing which will lead to money supply expansion. Instead, investors have been selling gold and buying stocks on this news.

The US Federal Reserve Bank has come close to doubling the amount of assets (and liabilities) held on its balance sheet through various lending programs, in essence an expansionary money supply, and today announced a more aggressive plan for quantitative easing that entail purchases of government bonds; the Bank of England has committed to spending £75-billion on government bonds purchases; even the Bank of Canada has suggested it could undertake both quantitative and credit easing in coming months.

These unprecedented experiments with monetary policy easing raise the possibility of inflation over the next few years and erosion in the value of these currencies versus hard assets given that the supply of gold, for example, is relatively fixed.

The bond market in Canada is pricing in just 1.4% annual inflation over the long term which makes good sense in the near term but is likely too low over the long term. Investors should therefore accumulate gold as it falls.

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