Another false dawn for gold?

The latest kick in the gold price through the $670 level on Friday could be the start of another jump upwards, or just a blip.

LONDON - 

As was pointed out during the week by the commodity analysts at Natixis in London, base metals are in a volatile phase with big fluctuations particularly in copper lead and zinc (Base metals 2007  - Learning to live with volatility), but precious metal prices have been, in comparison, fairly stable.  But the end of the week saw an upwards shift in the gold price to over $670 an ounce, where it has remained on Monday, and the question in gold watchers minds is does this represent the next stage in the runup to significantly higher price levels, a new slightly higher trading range, or yet another false dawn?

This year, the price has fluctuated between $608 and around $680, but most of the time it has rested in the $640-$660 ranges with the occasional breakout above.  It has breached $670 before - in February, April, May and June - but has always so far been brought down back to the earlier trading range, often through rumours of, or actual, Central Bank sales, or occasional bursts of dollar strength, movement in the oil price, or any other factor which makes the markets nervous.  So, is this another case of the same old story, or are we going to see a sustained price increase taking the yellow metal up to perhaps the $690s, with breakouts to $700 or above?

If I knew the answer, I should probably be a gold trader rather than a commentator!  But one can take a stab at the scenario.

Gold fundamentals remain positive for the price.  Jewellery demand seems to have accepted higher price levels and appears to have stabilised, or increased.  ETF gold investment has continued to rise and now is at record levels.  Mine production is flat at best and the price has ridden some pretty high levels of Central Bank sales.  The 200 day moving average price has been rising consistently.

To set against this is, almost certainly, the desire of the international monetary authorities worldwide to not see a huge depreciation in the value of the US dollar which would destabilise the world's economic system and the US economy itself, which is still by far the world's largest.  It seems likely therefore that, as I have said before, that any upward movement in the gold price (which correlates with dollar depreciation) is likely to be stage managed as far as the monetary authorities are able to do so.  Gold will almost certainly continue to rise, but it may take some kind of catastrophic incident affecting the US economy directly, to trigger a major breakout.

So the scenario is, as I see it, an upward price movement through the remainder of the year - but a gradual one.  $700 may be breached, but perhaps not yet, but I still believe the $1,000 gold price is an awful long way ahead, and if it is not, then that would suggest collapsing economies on a scale that would be in no-one's interest.  Gold may rise sky-high, but if it does the rest of your assets may be worth little! 

So, maybe not a false dawn, but perhaps the start of a move to the next gold price plateau unless there is some more heavy handed action by monetary authorities to stabilise the dollar and keep gold in its cage.

As for gold stocks, this is, of course, not particularly good news.  Costs are in general rising faster than the gold price and the latest run of half yearly statement from the gold mining majors are hardly encouraging in this respect.  Just as higher gold prices can lead to a fall-off in production as miners work lower grades which are thus made economic, so the rising costs and flat gold price scenario may lead to higher gold production as the miners revert to mining higher grades and perhaps this could lead to higher output in the years ahead assuming this situation continues.  But, this takes a fair amount of time to work through the system.

But, coming back to basics, fundamentals for gold are currently strong and the general consensus appears to be that a continuing increase in the gold price is definitely likely, but whether this will be slow and managed, or a fast move to higher levels, remains to be seen.  My personal view is that the former is more likely than the latter, but there are plenty out there with far more experience than me in gold price predictions who would plump for the big breakout scenario.

SUBSCRIBE to Mineweb.com's free daily newsletter now.

SHARE THIS ARTICLE

Print story      Email story      Subscribe to free newsletter

Back