**[investwise]** Dominic Frisby: Weakness In Gold Will Mean An Opportunity In Equities

 

On 21 June gold broke out to new all-time highs above $1,260 an ounce. It pulled back, but then on 28 June it moved briefly above $1,260 again. Ten days later it was down some $80, flirting with the $1,185 mark. That's quite a correction and it's concerned a lot of people, so I wanted to address it in today's Money Morning. Is this anything more than a "healthy pull-back"? Let's have a look...   A summer pull-back for gold is normal The first thing I would say is that it is perfectly normal for gold to pull back in the June-August timeframe. The chart below (courtesy of Dimitri Speck) shows the seasonal tendencies of gold, based on its price action over the last 40 years. As you can see, in the summer gold tends to languish - at the very least - and, as a consequence, the June-August timeframe is usually one of the best times of year to buy.   My second observation is that gold's June high above $1,260 was a function of US dollar weakness. Against the euro and the pound, gold made its high on 7 June - exactly according to Speck's seasonal pattern - and then made a lower high on 21 June. This next chart shows the gold price since the start of 2010, then beneath (in red) gold against the euro, and beneath that (in blue) gold against the pound.     Is the case for gold weakening? As we noted in Money Morning the other day, the European Central Bank has effectively tightened monetary conditions recently, and this has been responsible for some of the euro's strength in recent weeks. Meanwhile the pound, under our new austere government, has been a marvel. This semblance of fiscal sanity returning to both sides of the Channel will have weakened the case for gold. But therein lies the question. Are we really at the dawn of a new age of austerity? Has Austrian economic thinking replaced the Keynesian addiction to government spending? If we are, and it has, then there is no longer such a compelling case for gold. At MoneyWeek, we don't make judgements based on party politics. We disliked Gordon Brown because he made bad decisions for the country, not because he was a member of the Labour party. But I have to say I'm a big fan of the steps this government are taking to cut wasteful spending and improve efficiency. I like the fact that they are attempting to lighten the debt load and set the example of living within your means. However, one must not get wedded to this new 'austere' moniker. It's early days. There has been no crisis yet. We have to wait and see how they will react when it comes - as sure enough it will. How much mettle will they really have, when push comes to shove? Meanwhile, we are still in an environment of negative real interest rates. Inflation will come down a little as a result of sterling's recent strength, but annual consumer price index (CPI) inflation is still above 3% and retail price index (RPI) inflation above 5%, while the Bank of England rate is sitting at 0.5%. And neither of those are adequate measures of inflation, as they do not take asset prices into account. As long as savers continue to make a loss, gold should thrive. In the UK we still have gigantic debts to overcome. We are still overly dependent on the revenue generated by the City, which could quickly diminish in the event of another stock market rout. Our day of reckoning still lies ahead. But look across the Atlantic and there is no sign of any attempts to get spending in check. In Illinois, for example, which is virtually bankrupt, Fox News reported on Wednesday that "40,000 state workers are to get 14% payraises." This is just one example of many. Money that people don't have is still being recklessly spent. 'Helicopter' Ben Bernanke still believes in his printing press (and Goldman Sachs this week issued a call to him to turn it back on). Meanwhile, judging by the ever-increasing deficit, Barack Obama seems to think the US can spend its way out of this. The US will have a much greater impact on the gold price than us and, while there is still so much uncertainty and profligacy, gold should be fine. The gold bull market has further to go To conclude, I don't think the apparent embrace of 'austerity' is going to stop the gold bull market. The fact is, you seem to get one or two major corrections in gold per year. This has been the norm since the bull market began in 2001. I would argue that now is just another one of many. In fact, the correction probably has further to go. The signs were there a few weeks back - indeed, I wrote about them here: Three reasons why gold may be due a correction. The new highs in gold were unconfirmed by the gold stocks, by silver and by the other currencies. It's normal for gold to at least drift in the summer. But if gold were to fall below the magical $1,040 level - the old high and the price at which the Indian government bought last year - and it were to fall on high volume, I would start to think this was something more than a normal pullback.   Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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