What happened to $1,000 gold?

The recent pullback in the price of gold has sparked a slew of inquires as to just what precipitated the drop and if this is the end of the bull market in gold. The following is my analysis of the current market activity and prospects for gold's future.

There have been five prior “corrections” to the current long-term secular bull market in gold that began in 2001:

1. 2003 - Gold at $382 dropped to $319 for a 16% correction

2. 2004 - Gold at $425 dropped to $375 for a 13% correction

3. 2005 - Gold at $536 dropped to $489 for a 9% correction

4. 2006 - Gold at $725 dropped to $560 for a 22% correction

5. 2007 - Gold at $841 dropped to $778 for an 8% correction

Correction #6, from a March 17th high of $1002 to a low of $852 on May 1st, is 15% so far. Therefore, if this market follows its past moves, the next up-move for gold will take prices to between $1,175 and $1,485 before another major correction.

After each correction the analysts on Wall Street were claiming the bubble in gold had burst and lower prices would be seen in subsequent years. Obviously they were wrong five times in a row.

Firm long-term fundamentals

Secular bull markets in commodities tend to have a life of 15 to 20 years. I see the current gold market no differently. Even if gold simply adjusts for inflation we should see $2156. While there may be more volatility and wider price swings in this market, it has been seven years in the making. It is very different from the rapid run up and run down we experienced in 1979-80. Therefore comparisons to 1980 are not valid.

The fundamentals for higher gold are firmly in place:
-Increasing budget and trade deficits
-Higher oil and food costs
-Increased cost of living
-Artificially low interest rates which result in a softer dollar

And this does not even take into consideration the consequences of another terrorist attack or escalated tensions in the Middle East.

Further deterioration in the equity and credit markets could spark a flight to safety as investors have already experienced the Fed's willingness to inflate to avoid a collapse of America's banking system. Inflating to save financial institutions has a bad side effect...Inflation!

In this recent drop we saw traders booking profits at the end of the first quarter of 2008 from one of the only profitable trades on Wall Street in the last six months: GOLD! End of quarter sell-offs in commodities are very common and this quarter was no exception.

Conversely equity markets often rally. Many institutional investors and pension funds will overweight their portfolio with equities and “paint the tape”, engaging in window dressing.

Not too late to discover great values

So if you are long gold stay long. If you haven't participated in the greatest gold bull ever, it is not too late. This recent pullback should be no different than any other and represents a great opportunity.

I see the greatest value in the gold market today in early American $20 gold coins and gold commemorative coins. These markets have not experienced the same growth as gold bullion yet held very well during this correction. That is a clear sign this area of the gold market has incredible strength and is overdue for a big increase.

Expect to see more and more recommendations from many experts on the numismatic gold market. Numismatic gold offers unique privacy, portability and tax advantages not offered with gold bullion.