In rush for liquidity, gold takes a hit

Having sloughed off over $31 of its market value, gold seems to be on sale today. Experts are wasting no time in suggesting now is the perfect time to step in and add gold to your portfolio.

“Investors are doing what they should; they should be buying these dips,” says David Franklin, CEO, Sprott Private Wealth and market strategist for Sprott Asset Management. “Today what we see is a combination of people who have been (engaged in) big speculative activity are locking in their profits, but at the same time it would appear from the charts that you’ve got people who are stepping in to buy as well.”

It may seem a bit out of character for gold to be heading south at a time world seems to be beset by human tragedy and political turmoil, but Franklin says it’s also time for many investors to book profits.

“There’s been a lot of speculative activity in gold and silver, so people are taking the time right now to take profits,” he says. “If you look at the way gold and silver have been trading today, they have come off the lows of the day, what that tells me is that people are buying the dips.”

In a rush for liquidity a sell-off in gold is not a big surprise. Franklin finds it very encouraging to see investors taking advantage of low prices to add precious metals to their portfolio.

“Given what’s going on in the world, nothing has changed in the gold silver space,” he says. “If anything the story has gotten even stronger given the Bank of Japan’s reaction, [and] given the discussions that were going on in Europe over the weekend.”

In the wake of the recent quake, the Tokyo Stock Price Index, Topix, dropped by 18%, the largest one-day slide since October 2008. The central bank reacted by injecting 23 trillion yen ($280 billion) into the financial system in two days.

“The reaction by the Bank of Japan was very interesting to me only in that when extraordinary events like this happen, the central bank would choose to print dollars.”

Franklin cautions that there’s now more risk inherent in the system and advises to consider precious metals as a natural haven during calamitous events like those that currently plague Japan.

“We’ve seen the central banks are also revealing their policy reaction by flooding their system with liquidity and [that in turn] devalues dollar and makes gold and silver even more valuable.”

Out of fear of the market reaction the central bank decided to flood the system with liquidity. A measure that Franklin says is “only beneficial for gold and silver prices in the long term.”

“The code here is Japan is in an unprecedented emergency, so the central bank should do something unprecedented.”

All the key drivers of precious metals, he asserts, are better placed at the current time.

“Let’s look at the basic drivers of the gold and silver prices: insecurity with what’s going on in Europe; that hasn’t changed,” he says. “They have solved nothing in the Euro debt crisis. Nothing has changed on the thesis of gold and silver, we’ve just got a momentary rush for liquidity; it doesn’t concern me at all.”

As a “huge risk mitigation tool,” he says, gold and silver is money and, therefore, “a cash replacement within a portfolio.”

“Using precious metals as cash in a portfolio has paid off handsomely for anybody who’s done it in the last 10 years,” he says. “Its instances like [Japan’s crisis] where we see gold and silver have their spot in any portfolio.”