In the recent commodities sell-off, gold has been relatively unaffected. Since gold trades on a 24 hour basis worldwide using different exchanges and currencies as settlement mediums, the price of gold can more accurately reflect world events. During the month of May, when gold started to sell off in US dollars, problems in Greece and Ireland began to bubble to the surface, sending European citizens running for the safety of gold. Gold’s euro price quickly clawed back its losses and moved to new highs before selling off in euros, counterbalancing the fall in dollar denominated gold, as shown below. Gold typically moves lower in May then sideways throughout the summer, building a base for a rally in the fall, so the price action has not been out of the ordinary. Should you consider selling into this period of strength during the typical summer weakness? No, there are a number of reasons to continue holding gold during this time period. The first reason is directly related to events unfolding in Washington DC. The 2011 budget was finalized six months after the start of the fiscal year and given the current climate I believe that the odds of the 2012 budget passing on time are not good. A bill to extend the debt ceiling has yet to be passed and the Congress and President continue to haggle over the best economic course for the country. Will the US embark on a road of spending cuts and slower growth or continued stimulus and a collapsing currency? The upcoming 2012 US Presidential and Congressional elections give investors a second reason to be bullish on gold. Despite calls by constituents for meaningful spending cuts, Congress continues to spend and with an upcoming election politicians will need to show their constituents that they are creating jobs by approving new entitlements. A third reason is linked to the disaster in Japan. Plans have been made to rebuild the affected areas which mean increased Japanese government spending funded by JGB’s. This will be bullish for commodities across the board. The fourth reason is related to the problems affecting the PIIGS countries. Problems surrounding Greece remain unresolved as it appears the EU/ECB/IMF will kick the proverbial can down the road. As Greece begs for a bailout it is quickly forgotten how they manipulated their debt numbers in order to enter the EU. Any new bailout of Greece will certainly draw cries from Ireland for a restructuring of their agreement. The banking system in Ireland continues to have problems while Spain moves towards a bailout and Italy moves onto the radar screen. A fifth reason is emerging from South American as inflation begins to rear its ugly head in Argentina and Brazil, while Peru and Bolivia deal with sovereign problems. Argentina has national elections later this year and inflation is already rising at rates topping 25% with the government threatening to shut down private datakeepers who show the true statistics. Brazilian real estate continues to rise at double digit rates and the central bank remains entrenched in a rate rising cycle attempting to keep a lid on inflation and real estate prices from going parabolic. Humala’s victory in the Peruvian presidential election is troubling. His past comments regarding windfall profit taxes on mining companies and socialist connections will trouble foreign investors until they are shown otherwise. Bolivia continues to frighten investors with rumblings surrounding the possible nationalization of silver properties. Finally, the sixth reason is related to the buying of gold by central banks worldwide. So far in 2011, Mexico has purchased 93.3 tonnes, Russia added 22.5 tonnes, and Thailand increased gold reserves by 9.3 tonnes. The continued purchase of gold by global central banks is extremely bullish since gold will be taken off market and placed into strong and stable hands. Investors should not consider going short gold because it only takes one small bit of news to turn the market higher. The surprise announcement that the Indian Central Bank purchased 200 tons of gold from the IMF in 2009 touched off a 20% rally in one month. While I am extremely bullish on the prospects for both gold and silver in the long-term, investors need to practice risk management with regard to their positions. This would be a very good time to reduce leverage with respect to bullion over equities while maintaining core positions and looking for attractive entry points over the summer. Any selloff in gold will be limited in nature as the $1400-1425 level is the new absolute floor for the price of gold. This represents approximately a 10% downside risk to investors. Investors would be wise to continue holding gold and adding to positions during this seasonally weak period as the drivers for a higher gold price later this year remain in place worldwide.

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