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Gold prices have been languishing in recent weeks as investors have been drawn into riskier assets such as equities.
New highs in major world stock indices including the Dow Jones Industrials and the Nikkei 225 have investors looking for higher returns.
"Investors are not really looking for safe havens at the moment," Eugen Weinberg, head of Commodities research at Commerzbank, told Reuters. "Gold as inflation protection should get more demand from investors in the second half of the year. Right now, the market participants are looking for more yield and they're finding it in other asset classes like equities."
In fact, the amount of gold held by the SPDR Gold Trust (NYSE: GLD) has been declining since it peaked on Dec. 10, 2012. It was at 1,353.35 metric tons then and now stands at 1,244.86 metric tons as money has flowed out of precious metals and into financial assets.
But not everyone is shunning gold – and you shouldn't, either.
Central-Bank Gold Buying Continues
The central banks of South Korea, Russia and Kazakhstan have all reported additions to their gold reserves this year, continuing the trend of central bank gold buying.
Data for January show that Russia and Kazakhstan have each increased gold purchases for the fourth consecutive month. The Bank of Korea issued a statement saying that it has purchased 20 metric tons of gold – more than 643,000 troy ounces – during February, increasing its gold reserves by 24% to 104.4 metric tons.
"The Bank of Korea's gold buying is part of the long-term diversification of currencies and assets in foreign-exchange reserves," South Korea's central bank said in its statement. "It is of no great importance to try to gauge if it's profitable or not based on short-term price swings."
Even after last month's gold-buying spree, the Bank of Korea still does not own a lot of gold compared to its total foreign-exchange reserves. According to the World Gold Council, South Korea's 104.4 metric tons of gold puts it at number 34 on the central bank league table of gold reserves, just behind Greece and just ahead of Romania.
Gold accounts for only 1.73% of the Bank of Korea's reserves as of the end of February. If we take the central bank at its word, then there would seem to be plenty of room for more gold as the Bank of Korea continues to diversify its reserves.
Central-bank gold buying is one of the market "fundamentals" that Money MorningChief Investment Strategist Keith Fitz-Gerald has advised investors to watch.
"Stick to the facts: Fiat currencies are failing, the world's central banks are buying more gold than they ever have in history, and the world stands onthe brink of a 1930s-style currency war. In the long run all three are incredibly bullish influences forgold prices," Fitz-Gerald wrote last week.
Gold Prices Going Forward
We remain bullish on gold prices and other precious metals over the longer term but there can be no denying that GLD is near a critical support level around $150.
GLD first hit the $150 mark in April 2011 and faced considerable resistance there. The popular gold ETF did not break out above $150 until mid-July 2011 during the last leg of the rally that took GLD to its all-time high above $180 in early September 2011.
Since then, GLD has tested $150 three times. The first two tests, at the end of December 2011 and in the latter part of May 2012, were successful. The third and perhaps most critical test of $150 is going on right now.
If the $150 level is held this week – especially after the better-than-expected jobs report released Friday – then investors should feel reasonably confident that the correction in GLD is complete. If this third test is successful, then it makes sense to accumulate GLD around the current mark for long-term appreciation and diversification.
Gold prices ended higher last week, with gold for April delivery up $1.80, or 0.1%, to settle at $1,576.90 an ounce. That was a 0.3% weekly gain for gold prices.
[Editor's Note: As Money Morning Chief Investment Strategist Keith Fitz-Gerald told us last week, there's a huge force at play in the gold markets.
"If you've ever suspectedgold pricesare being manipulated, you're not alone–and you're right, they are," said Fitz-Gerald.
Don't miss his fascinating explanation of what's been happening in the gold market for years – along with four things gold investors must do. You can read Fitz-Gerald's gold-price manipulation story here.]
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