Why Gold’s Rebound Isn’t Over

Why Gold’s Rebound Isn’t Over

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Well, we told you so.

That is, we warned you back in September, after gold prices plunged nearly 10% in a single trading session in the biggest selloff on record in 18 years, that the precious metal wouldn’t linger long below $1,650 an ounce. And sure enough, by Tuesday renewed anxiety about what lies ahead for Europe and the euro had propelled gold prices above the psychologically important $1,800 mark once more. That’s still below the high of $1,973.70 recorded in September – and gold prices were no safe haven yesterday as the stock market panicked – but there’s reason to believe gold will keep buffing its luster.

That doesn’t meant gold prices will shoot straight up every time a bearish headline out of Europe roils financial markets, however. Nor should you cash out your other investments, buy gold bullion, and hide it under your floorboards or in the air-conditioning vents. The higher prices climb, the more volatility you should expect.

But the “fear trade,” as bullion traders call it, is a tried and true response to geopolitical turmoil, including this kind of massive uncertainty. True, some investors may end up selling gold in order to raise cash as other portfolio holdings decline in value rapidly. But that selling pressure – over the medium term, at least – is likely to be more than offset by buying interest on the part of jittery investors looking for a safe haven in the form of an asset that will hang on to its value better than paper securities. Most of us in the developed world don’t need to worry about converting all our capital to gold so that we can take it with us while fleeing wars or pogroms, but the metal continues to serve that psychological purpose.

Even if we don’t see gold break to new highs before the end of the year, the flow of grim and gloomy news from European capitals and European banks is going to put a floor under gold prices. That means that even if you don’t feel like stocking up on more gold coin today, you might want to take advantage of price dips like the one gold has just emerged from. It’s one of the few corners of the financial markets where volatility might actually end up working in investors’ favor.