Bullish on Gold Trade

NEW YORK (TheStreet) -- Gold fell to a two-week low after an unexpected dip in existing-home sales put a damper on economic recovery and put inflation expectations into question. Still, there are plenty of indicators that suggest the precious metal is far from being overbought.

investor demand in gold hasn't cooled despite a temporary rise in the U.S. dollar on fears of inflation, the decline in demand for gold in jewelry and higher scrap sales. Gold remains attractive because the dollar remains fundamentally weak. Additionally, many investors are still piling into gold on the belief there will be a spike in inflation when the velocity of money picks up.

A third indicator that gold is still in high demand is China. In the second quarter, China bought nearly 600 tons of gold while Russia bought nearly 100 tons. Experts believe the two nations are buying gold to reduce exposure to the U.S. dollar for diversification purposes.

Fourth, gold will remain attractive because the supply of gold is starting to diminish. Over the past decade, the world's central bankers have been sellers of gold. However, in the second quarter, they became net purchasers of gold.

The global supply of gold is contracting with mining production on a downward slope since 2001.

In a nutshell, the recent decline in gold was a hiccup and the metal will remain attractive in the near future. When investing in gold, one must keep in mind the risks that are involved. To help mitigate these risks, an exit strategy is important. An exit strategy which identifies price points at which an upward trend in gold could be coming to an end can be found at www.SmartStops.net.