UPDATE: Sep 23, 2010
We wrote on August 5, 2010 that investor demand was the main drive behind the upward trend in gold prices. The fundamentals have not changed. Fear of the world economy is rising and interest rates will likely stay low considering the slow economic growth. These encourage investors to purchase gold and gold related securities like gold mining stocks.
Federal Reserve recently announced that it would stand ready to stimulate the economy with another round of quantitative easing, a.k.a printing money. The announcement itself eased the market and send gold prices to near $1,300 an ounce.
The physical demand, however, is dwindling. Gold prices hitting record highs turn the jewelry market into sellers market. The Austrian Mint reported a drop in sales in the twelve-month period that ended in August.
Gold Price Forecast For The Remainder Of 2010
Gold is trading well above its support line, in the uncharted territories. An old high works as a strong support when prices crossover with good volume and hold ground. Prices were once supported just below $1,270, in the range of the previous high and have been rising steadily. That gives a highly bullish technical forecast for gold prices.
You have everything you could ask for prices to advance. Fear of the world economy is rising and the global expansionary monetary policies work as a strong support for prices. The precious metal is becoming the currency and a reserve asset.
Central Banks, discouraged by the currencies uncertainties, are becoming net gold buyers and are expected to buy 6 million to 10 million ounces of gold annually. Fed announcement of a possible quantitative easing sent the US Dollar index below key level of 80 and dollar looks bearish against the basket of major currencies. Japan for the first time in eight years intervened in currency market and devalued the yen. Concerns over health of the European economy are making a comeback to the news headlines.
Some analysts are predicting gold at $2,000 per ounce or more by the end of the year but we stay with our earlier forecast of $1,500 an ounce.
Invest in gold and gold stocks with a plan and exit strategy
Here is some recent cautionary advice: Jon Nadler senior analyst at Kitco says in his daily commentary “not everything you read on bullion bully bullish gold websites is true”. He recommends 10% gold allocation in a portfolio. George Soros, billionaire financier who owns gold assets said that gold is "the ultimate bubble … it's certainly not safe and it's not going to last forever."
Original Post August 5, 2010
Gold price surged to a nominal record of $1,251 an ounce in June followed by a downward price trend in July. Where will the gold go from here?
Gold has both investor demand and physical demand. The investor demand arises from betting on high gold prices and lower currency value and the physical demand is for jewelries and central back reserves.
The growing sovereign debts in a fragile economy make investors worried about the ability of the governments to repay their debts. When the governments prefer a weaker currency they may also decide to inflate their debts away by printing paper currency.
Investor demand with fear of the world economy and low returns on the other investments has been the main drive behind the upward gold price trend. Beside the investor fear, the physical demand in the gold market is increasing but it is not substantial. People's disposable income is rising in Asian countries like India and China where family savings are traditionally stored as gold jewelries. A surge in the gold prices; however, creates a temporary seller market. Last year, for the first time, investment demand exceeded jewelries demand.
The government’s official policy of low interest rates, accumulating deficits and quantitative easing is inflationary. Fear of inflation makes gold even more attractive when currencies are unpredictable and return on other investments is low. These forces create investor demand that pushes the gold price higher to resume the upward price trend. The declining gold production will support Governments and individuals desire to find reliable wealth storage in a bull gold market where prices can reach $1’500 or higher as some analysts forecast.
Bare in mind that market is not short of analysts who believe gold market is a bubble and forecast a downward Gold Price Trend. Gold bears argue that gold does not have intrinsic value and the only value is people's self-confirming beliefs.
Investing in physical gold has also some drawbacks when compared to other investments tools like shares, bonds, and property that give dividends, coupons, and rent. Some investors chose to invest in gold mining companies to gain exposure to dividends and capital gains.