GOLD ANALYSIS

Last chance saloon for gold investors to jump in?

The currently stuttering gold price as the northern hemisphere enters the summer season, traditionally a weak time for the gold price, could, some experts believe be the last opportunity to buy gold before an autumnal surge.

Author: Lawrence Williams
Posted: Monday , 29 Jun 2009

LONDON  - 

Some analysts see the regular annual hiatus in investment in gold during the northern summer season, which is now upon us, coupled with what they see as unwarranted strength in the U.S. Dollar, as providing the last major chance for gold investors to buy at 'reasonable' prices before a big surge in the gold price later in the year.  Buy on weakness is the cry - again! 

They may have a point, but gold has a nasty habit of defeating its proponents and does seem to have found so far a seemingly insuperable psychological barrier to advancement beyond the US$1,000 level - despite it from time to time surpassing old high points in most other major currencies. 

If we look at the logic behind the arguments, there seems to be a case.  Take dollar strength, for example, against which the gold price typically falls when the greenback moves upwards.  The argument is that the unprecedented growth in U.S. Money supply with the flooding of the market with dollars by the government in an attempt to ward off a depression will ultimately lead to a serious inflation problem.  And gold is seen as benefiting strongly in an inflationary environment.  There is also the view that the U.S.'s big current account deficits will, sooner or later, lead to a major dollar decline against other key currencies, and this too will put upwards pressure on the gold price at least in dollar terms. 

Fundamentalists, on the other hand, reckon that gold is vulnerable due to falling demand in the key industrial (jewellery) sector and in key purchasing markets, notably India, where there has been a substantial fall in purchases with traditional buyers looking for a fall in price before coming back into the market.  This has been coupled with a steep drop in jewellery sales in the recession hit West and a big increase in scrap coming on to the market.  The gold price has managed to remain high (relatively) in the face of these adverse factors, due to investment demand - notably in ETFs and bullion purchases by those wishing to protect their wealth in the face of uncertain stock markets. 

The problem, at the moment, is that sentiment seems to see the recent stock market rallies as signifying the end to the big downturn and more confidence in the economy, however ill justified, is potentially bad for the gold price as the wealth insurance element begins to fade away. If the recent stock market rally does prove shortlived, institutional investor interest in gold could return (not that it has really yet gone away).  ETF holdings - the easiest measurement of investor interest - have remained pretty static recently, which at least means lack of selling pressure and suggests the big money is still hedging its bets. 

What may be significant for gold though is that so far the price seems to have been relatively little affected by the adverse factors of low industrial sales and high scrap inputs to the market.  True it has not burst upwards as the believers would have it, but it has not yet fallen back that significantly either.  There is still the definite possibility that we will see further gold price weakness in the next couple of months but many expect this to be countered with a surge later in the year. 

On Indian buying, much is said about resistance in the market to the higher gold price, but the longer gold stays up in its current range there has to be the likelihood that gold will be rerated to its new levels in the Indian market and bullion sales will pick up again once the rerating is generally recognised. 

Gold mine production continues to fall, albeit not that significantly with production growth in countries like China matching falls in some of the traditional major producers like South Africa. 

Central Banks - the other major source of gold coming on the market - see generally reluctant to sell at the moment and the 403 tonnes of IMF gold due to come on to the market in an orderly fashion are likely to have little impact.  Indeed if the IMF gold is quickly absorbed with no impact on the price this could prove a major plus point for the future of the gold price. 

All in all it does seem  to be a not unreasonable prospect to see gold continuing its climb later in the year, even if stuttering a little at the moment.  If and when it does breach the $1,000 mark, the psychology which had seen the mark as a barrier will likely turn to give the metal price a sharp boost.  As the global impact of quantitative easing - not only by the U.S., but also in may other areas as well - takes effect inflation is likely to return globally.  Those suggesting hyperinflation and huge gold price increases as a result will, we sincerely hope, be confounded as the results would be too horrendous to contemplate on a global scale, and lead to all kinds of disastrous political consequences - wars even. 

Thus any period of weakness now in the gold price may well provide a buying opportunity.  Sooner or later, we feel, the $1,000 barrier will be breached and once through that it may well stay there for the foreseeable future.