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Should Investors Buy on Gold's Dip?

With gold closing successively lower and well below $1,200 an ounce on the Comex for the third straight session, investors are starting to take a hard look at this so-called “safe haven” asset.

AP

Longer-term investors including top hedge fund manager John Paulson are betting on the yellow metal. A Paulson & Co. 13F filing released by the SEC this week showed about 30 percent of his $21 billion holdings are still riding the gold rally.

But, shorter-term investors, including Dennis Gartman, started recommending investors literally run for the exit early this week (though for Gartman, short is really short—within days of his initial call, he resumed a long gold vs. euro position.) Read Gartman's earlier comments here.

So, which is it?

“There are two types of traders in the gold market these days. The first is the investor looking to hedge his portfolio's currency risk by buying gold. The second type is the speculator. Gartman is speaking to the speculator,” says Kevin Grady, gold trader with Man Financial. But, Grady says, “there are a lot more investors buying gold these days than speculators.”

A traditional catalyst for longer-term investors is a fear of inflation. But, short-term, that fear is abating in the U.S.

“Although headwinds emanating from Europe appear to be manifold, one threat (at least over the near-term) we do not face is an inflationary one. Our longstanding call for core inflation to fall below one percent on a year-to-year basis in 2010 has arrived with the release of the April CPI report,” says Mike Darda, Chief Economist at MKM Partners.

“People are buying gold in anticipation of much higher inflation to come, and probably also fear that when everything else falls, gold may shine.”

Another possible catalyst is the fear factor as measured by the CBOE Market Volatility Index or VIX–the option index topped 48 for a while today, its highest level in over a year.

“What changed in the last month is that there was a panic rush to gold in Europe, not elsewhere. So some of the latest European buyers may be selling,” says Adrian Day, CEO of Adrian Day Asset Management.

“Gold moved too far too fast. It's above trend” and “on a short-term basis, gold could be weak. With stock markets collapsing, there will be margin calls, and gold is often the first thing to be sold when an investor has margin calls (because of its liquidity).”

But longer-term, he says, “gold may pull back to trend or even lower, $1150 even $1100, but on dips, I'd be buying.”

Or, as Adam De Chiara, Jefferies Asset Management Co-President puts it, “As long as short term interest rates remain at historic lows, and the global currency situation remains unsettled there should be continuing investor demand for gold.”