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The Truth About the Gold Selloff – And Why It Won’t Last

We spend a lot of time talking about the “global resource chase,” as it pertains to things like oil, natural gas, coal and uranium. But the truth is, the global resource chase isn’t just limited to energy.

The global resource chase involves other commodities, as well. Especially precious metals.

And right now, there’s a major profit opportunity brewing in that very arena.

You see, the last few days have been a nightmare for gold. The metal has now fallen to its lowest level in five months.

Now, the media and many analysts will tell you the reason for this selloff is the U.S. Federal Reserve. Specifically, minutes from the latest FOMC meeting indicated the central bank would put an end to its quantitative easing program this year. They also hinted at higher interest rates.

That’s one explanation, but it’s not necessarily true.

The reality is that the selloff in gold may be occurring for a much simpler reason: Traders are taking profits. And if that’s the case, gold is setting us up for a superb opportunity in the weeks ahead.

Indeed, the case for owning gold is no weaker today than it was 10 years ago when the precious metal bull market first began in earnest.

Remember, it was excessive money printing, out-of-control debt burdens and political mismanagement that crashed the global financial system and sent gold soaring in the first place. And here we are, a decade later, and none of these problems have been resolved.

To the contrary, they’ve gotten bigger.

The result of the latest round of fiscal bargaining was even more spending. And the negotiations on spending cuts that are supposed to be occurring in the next few months aren’t really spending cuts per se, but rather a reduction in the growth of spending – otherwise there would be no need to deal with debt ceilings.

The fact is, we’re still spending money that’s being formed from thin air. And the debt ceiling talks will only cover the bills we’ve already racked up.

So despite what you may be hearing, the case for gold is as bullish as ever.

Why then are gold prices moving lower and not soaring higher?

The answer is that gold trades like any other financial instrument in the short term. It’s subject to supply and demand, and the prices are set at the margins by a small group of traders. The gold market is also 12 times smaller than the stock market, which means greater volatility and bigger price swings.

Right now, the price of gold is hovering around the $1,650 level – a very, very important price level. If gold closes below $1,650 an ounce for a few trading days, the next leg down will have begun and prices will fall to the next major support level of $1,600.

And if the price falls and stays below $1,600 an ounce, you’re going to be looking at relatively unknown territory. At that point, gold will officially be in a bear market and the next leg down could take it to $1,400 an ounce before a recovery begins.

But don’t worry, because that will be the proverbial bottom. And once it’s hit, the big money will start piling back in.

So gold may be down now, but it’s really just setting itself up for a superb buying opportunity. For traders it’s all about timing. But for investors it’s all about value. And the coming weeks could provide satisfying opportunities for both.

So stay tuned.

On Friday, I’ll share the single best predictor of value in the gold sector as we delve a little bit deeper.

And “the chase” continues,

Karim Rahemtulla