Last October the price of the yellow metal rose back to almost $1800 an oz and all of us gold bugs breathed a sigh of relief. We had waited since September of 2011 for our favorite metal to resume its climb back to its all time high of $1900 an oz.
Our hopes were soon to be dashed.
Experienced investors know that every long term bull run will have its succession of highs interrupted by periods of correction and consolidation. Causes can range from simple profit taking, adverse fundamentals and contrary technical signalsl.
In golds’ case we had periods when price movements went lock step with that of oil, the dollar, or the S&P.
However, the overall driver was probably the fear of inflation and the preservation of wealth. Since its October peak the day to day scenario has become a jumbled up mix of random and contrary fundamental and technical signals. This is why gold investors are now getting the jitters, and little wonder!
Long Term, Don’t Rely On Charts
Starting with the technical perspective, in the first place chart signals are widely acknowledged, by analysts, to be less reliable for the longer term prospects for gold (and silver) than for stocks and many other commodities. This is not to infer that they should be ignored or treated with less respect and for the short term speculative plays there is no better guide.
It is simply the limited size of the precious metal market and the impact of large gold ETF sales and purchases, world wide bullion movements and announcements from Central Banks, seemingly orchestrated by the Fed, which are, more often than not, designed to halt or curtail any positive advance by gold.
The more cynical of gold buffs may feel that a significant number of economists and analysts are in league with big government in their hatred of gold. Right now there is a ground swell of opinion amongst them that gold has reached its peak and its all downhill or at least channelling, from here on in.
Same Old, Same Old. Gold Demand Continues Unabated
Fundamentally, little has changed since September 2011. China continues to buy and hoard gold with data from Hong Kong indicating an inflow of over 90 tonnes in November alone and that is on top of its own production as the worlds largest gold producer.
The Indian government continues to impose tariffs, taxes and other restrictions to dissuade the population from its tradition of gold ownership. A difficult task as the prime reason for their actions has been the weakness of the rupee but Indians are as keen on preserving their wealth as the rest of us! Indians are rushing to buy before the latest import taxes are imposed. Bullion Vault reports that western investors are continuing to add to their gold positions.
Deflation Now - Sky Rocketing Inflation Soon
Quantitative easing and other schemes designed, we are told, to ease the pressures on business and to encourage lending and employment, have, so far as we can see, been only a major benefit to banks. So far these excessive money printing exercises have yet to result in substantial inflation, but it is not difficult to imagine that sooner or later the money dam will burst and massive devaluation of the western currencies will be the order of the day.
A view, we guess, shared by the Chinese and all those other, so called third world, countries who have preserved their competitiveness and are regularly adding the yellow metal to their reserves.
Corruption In US Politics the Envy Of Southern Europeans
Currently the energy card is being played in the US to promote the feeling that the country will be self reliant on fossil fuels and that will herald a new dawn of full employment and prosperity for all. Back to the good old days. Americans will still eventually have to deal with a colossal and ever increasing debt mountain.
It is hard to credit that there is no desire by the Obama administration, or for that matter by the Republicans, to drastically curtail government expenditure. In practise we will see a continuing increase as there are too many vested interests with their snouts in the trough .
Sadly the US political system is being publicly shown up for the failings that have opened the door to corruption by any other name and on such a grand scale that Southern European and Latin America politicians, where graft and ‘irregular’ backhanders are endemic, must look on with envy.
- What has this got to do with the price of gold?
Simples! Precious metals, with gold the leader, are the worlds defence against the eroding value of paper currencies and specifically the dollar, followed by the euro, are heading down the fast lane to oblivion. And who will suffer most, why it will be poor old Joe Public just as it always has been.
Gold Lacks Impetus
In the shorter term it is possible that the price of gold will fall further, there are factors that contradict the longer term prognosis, equally this may be a bottom and a buying opportunity. I, personally, will feel happier about buying when I see a solid breakout above $1680 an oz.
Right now physical gold is in strong demand with the Shanghai gold exchange reporting record trading volumes with strong demand from India and China, a scarcity of gold coins with the Krugerrand premium near a five year high. At the same time the New York open today (Tuesday) saw gold pick up $8.00 before falling back $4.00 to $1654 an oz., still better than yesterdays close but trading is still thin and therefore choppy. Price movements seem to bear little relation to the hard facts.
We believe that in the short term the precious metal market will bounce around offering opportunities for short term limited profits. How long this will last we do not know. We feel that there will eventually be a significant breakout but whether to the upside or to the downside is far from clear due to the contradictory signals in play. Possibly more importantly, investor sentiment is getting hard to come to terms with.
To all intents and purposes there seems to be a lack of basic sense dictating the gold and silver market moves, this could be as simple as investors desire to stay liquid either because of fear or in anticipation of bargains to come. How can physical gold be in such high demand, with even rumours of delays in delivering on contracts, while the price in the paper only currencies of the developed countries languishes around 15% below its peak since which time western economies have tumbled yet further into the mire?
If we could solve that riddle we would be well on the way to a mega fortune but as they say ‘bull markets climb a wall of worry’. We have given just some of the reasons that are contradictory, there are many others that add to the reasons why gold investors are now getting the jitters. Given time and patience all will become clear.