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Managing Investors' Gold Expectations

NEW YORK ( U.S. Global Investors) -- It was a challenging week for gold investors.

Although the yellow metal has been on a spectacular 11-year bull run, recent strength in the economy has some thinking gold's heyday is over.

As I often say, investing, like life, is about managing expectations: Even throughout gold's decade-long rise, price action over the short term has gone both ways.

It helps to look at what happens after short-term drops.

For example, looking at the past decade of one-day, 5% declines in gold, you can see that this event is pretty rare.

In 2006, gold dropped more than 5% in a day only twice. In 2008, there were three such events. Another one occurred at the end of this February.

The 1.7% drop experienced over the past month shouldn't surprise gold investors given the seasonal pattern for gold. Whereas gold rises nearly 2% in both January and February, over the past 11 years, it's been a nonevent for gold to correct in March.

In addition, it's a good reminder that bullion has historically been less volatile than the stock market: The 12-month rolling volatility over the past 10 years for gold was 13%. For the S&P 500 index, the 12-month rolling volatility over the same period was 19%.

This March, there seemed to be one main driver 8,000 miles away negatively affecting gold prices. I often say that government policy is a precursor to change, and fiscal policy strongly affected the Love Trade in India last month.

To trim its current account deficit, India's finance minister proposed doubling the customs tax on the precious metal. It was soon reported that jewelers closed shops in protest.

As a result, gold imports into the world's largest gold market fell 55%.

It's not the customs tax that has the gold shops boycotting, says UBS Investment Research.

Jewelers' "prime gripe is with the new 1 percent excise duty on unbranded jewelry" leading to a greater recording of gold transactions, which means more regulation and red tape, UBS said.

What's so egregious to jewelers is the excise tax will be retroactive, so those shop owners holding old gold stocks will have to pay duty on those as well, the firm added.

Jewelers and bullion traders in India did call off their strike on Friday after India's finance minister said the government would address the concern of the duty on gold jewelry.

But the boycotting may arise again as the levy proposal will be up for consideration in parliament in early May.
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