The price of gold dropped by around 10 percent from its $1,000+ highs in just a matter of days indicating that one of the elements that had been used by observers to express caution over the rally in gold prices over the last one month seems to have reversed.
In particular, reports coming in from Asia suggest that investors and buyers in the jewelry sector have been getting back into the gold market in a massive way over the last few days after practically boycotting it in the run up to the recent rally. The jewelry market is usually quite perceptive in the assessment of price levels and this activity is indicative of an underpinning of the price of gold either at or around current levels and suggests further than upward momentum is likely to come back into effect within a short period.
The Eastern jewelry sector derives its living through daily trading in precious metals far more so than the Western jewelry sector since the mark-up margins are significantly less is usually a strong indicator of where the prices are headed. The last one week has witnessed reports of a massive upsurge in buying in countries such as Thailand, Vietnam, China, and India once gold prices came off the highs. Observers have even described this gold rush as being unprecedented.
The investor’s adage has always been to buy on weakness and sell on strength, which is clearly a wise principle but it is never easy to pick tops and bottoms. It would be therefore wise to seek guidance from those that earn their basic living from the marginal costs of gold. However, this more basic demand is likely to be interrupted by the profit taking in the institutional sector of the Western world with many funds seeking to enhance their basic liquidity. Another factor that is likely to affect the market is whether this will have yet run its course.
The indications are that investment demand has also soared over the last few days have been strong but with Western markets closed for the lengthy Easter break, it can be somewhat difficult to judge movements in price. However, what has been witnessed is a stabilization in gold prices at around the low $900s and is starting to creep up again with the Eastern demand being the driving force behind the rally. It is interesting to see what will happen once the Eastern markets open next week since they will probably be a good indication of whether there will be a quick bounce back towards the $1,000 level or the low $900s will hold or there will be a further drop.
No doubt still lingers about whether the majority of the specialist observers of the gold market are predicting a price rally in the next several weeks as gold price fundamentals continue being strong as institutions and Central Banks battle to address the effects of the sustained financial crisis the world is facing. Institutional liquidity will play a pivotal role but the massive re-entry of the jewelry rector is likely to ensure strong demand at least at current prices meaning that the downside risk is therefore more limited.
Whether the $1,000 price mark will be seen again in the next few months after the Eastern wedding season ends and demand is less is yet to be seen but there could be a good rally later on in the year especially if the dollar sustains its weakness. The sustained dollar weakness is likely to underpin the price of gold in the short term at the very least. Should the market reach or breach psychological price level of $1,000, there is likely to be some nervousness in the market once more considering what has happened in terms of price.
However, if the dollar strengthens and the US is able to avoid a real recession, the massive upsides that some gold followers have been looking for could still be further away than they would predict and hope.
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