Should Gold Investors Be Worried by the Recent Pullback Below $4,000?

The price of gold dropped to less than $4,000 an ounce during the week and is now trading in a narrow range from $3,990 to $4,050. This current price is a far cry from the $5,600 high the precious metal reached at the start of the year. Investors holding gold in their portfolios may now be wondering: should they be concerned about further retraction?

Let’s put this into context, because context is everything. Over the last two years, the precious metal has recorded gains of 65%. The bulk of those gains happened last year, so it was quite a climb. Today, the metal has pulled back by approximately 29% from its peak in January. Seen from this angle, a retraction of 29% isn’t something to cause significant worry because profit-taking and market consolidation usually result in a lull after such a steep price appreciation.

Another way to weigh whether there is cause to worry about the recent price dip is by comparing the price of the physical metal to what is happening to the stock price of the companies getting the metal out of the ground.

As already mentioned, gold has dropped 29% from its record set in January. During that same time, mining stocks have slipped 29%. Historically, mining stocks have dropped roughly twice as much as the physical metal. This time round, the metal and the stocks have retreated by approximately the same margin. What does that say?

Mining stocks lose their attraction when confidence drops regarding the profitability of the commodity they extract. In this case, prices of the stocks and the metal have fallen by nearly the same percentage, which shows that nothing major has happened to shake confidence in mining stocks. This means that the current dip isn’t something to be overly worried about.

Fund flows into gold ETFs provide further evidence that the fundamentals of the gold market are still intact. Money has kept flowing into gold ETFs even as gold prices struggled to climb past resistance points on trading charts. This suggests that gold holders having a long-term view of the market are still sitting tight. Only shorter-term holders or speculators have dumped their holdings.

From the discussion above, you can see that while the current situation may be uncomfortable, it shouldn’t cause alarm. That said, prices can still swing in a big way in either direction, so keep your ears on the ground to assess any developments that arise. Gold industry players like Collective Mining Ltd. (NYSE American: CNL) (TSX: CNL) are keeping close tabs on the situation, and so should you.

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