3 Reasons to Consider Buying Gold on Recent Weakness

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Today gold is down a massive 2.8% to $1285 per ounce. This steep drop wipes out the gains that had been had in the previous five sessions. But should you consider buying this weakness? There are multiple reasons why gold is a good buy for both a short-term trade and long-term investment.

The Fed’s Dovish Policies

Gold will have support on dovish comments from Federal Reserve Chair Janet Yellen that she has given during recent speeches, specifically the pledge to keep the environment friendly for growth. Remember that gold plunged following Yellen’s recent suggestion that within six months rates could be increased following the finishing of its quantitative easing program. However, with recent data still not up to par, Fed policy will remain highly accommodating to support continued improvements in the U.S. labor market. This will translate to selling of the US dollar and a longer term devaluation of U.S. currency which is bullish for gold.

Inflation is Good and Bad For Gold

Recent inflation numbers have been creeping up as well across the globe. While still not enough to give gold a lift at this point, upcoming U.S. data could spark buying, particularly if we see a continued significant deviation from expectations. One of the problems with gold (and all precious metals for that matter) is that they are generally a hedge against inflation. Inflation however has been absent for some time. Consistently low levels of inflation and results from data releases meeting expectations have kept the lid on gold prices. It is a fine line however. Gold buyers want to see an increase in inflation, which helps gold, but a severe rise in inflation could result in the Fed changing course to support the U.S. dollar which is bearish for gold.

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