What does the G20 meeting mean for Gold Prices short-term...?
THIS WEEKEND'S G8 and G20 meetings began disappointing the press before they even began, says Julian Phillips at GoldForecaster.
The US approach to growth, sovereign debt containment and debt repayment contrasts sharply with the European approach. This division should be added to fears that sovereign debt cut backs will not be achieved in the end.
The global financial mood is depressing, and is giving rise to falling confidence in the future of the global economy. Despite the best efforts of governments and the media, few are now convinced that growth will rise significantly. However, no currency or economic collapses are likely soon in our opinion. Instead, the dangers of GDP slipping from the current "L" shaped recovery back into recession are growing.
Government action should be coordinated globally if its present problems are to be resolved. And as China continues to grow – and as such a lot of the growth inducements are coming from Western governments – it is clear now that a Yuan revaluation is going to be well within single figures at best, until China is ready to place the Yuan firmly in international markets.
Is this background by itself enough to make Gold Prices rise?
The market mood for gold at present sees it completing a particular step of short-term consolidation after hitting record highs last week. But inside the Gold Price, what is there from which we can answer our question?
This is traditionally a quiet season for buying gold amongst the biggest consumer market, India. But it is clear that there are very large buyers in the Gold Investment market who are seeking to buy large amounts without chasing prices. These players have identified themselves to some extent as central banks. Not all of them are visible, however, nor are the sovereign wealth funds who are buying gold too visible. Their buying practice is to set price limits that they will pay and then wait for the offers of gold. Hence they too are not clearly visible when prices don't move.
Large long-term investors are buying price exposure through Exchange Traded Funds, and have bought 124 tonnes so far in the last month. They tend to Buy Gold as the price starts to rise.
Traders, in contrast, have changed their practice from one of pushing prices and leading the market (as they did five years ago) to following the direction of the market and profiting when others move the price. They find current conditions more difficult as a result. The net result has been that prices don't fall as far as the charts might indicate, but are rising higher than expected.
The meeting this weekend of the G8 and G20 will have no more effect, we expect, than past ones. Encouraging statements will be made about good intentions, but with no believable plan of action. As now is the time for them to act, the climate of uncertainty and fear will continue to persist. Unfortunately, politicians have other matters on their agenda and don't perform well, until a crisis is upon us. So we will have to wait for that crisis. Crises then tend to appear out of nowhere, hitting markets hardest and producing differing levels of panic.
To emphasize the point, markets have looked to governments to calm them when financial uncertainty persists. Government actions to date, taken inside the financial markets have not turned the global economy back to strong growth in the last three years. Banks have succeeded in softening most of the new regulations that will apply to them emasculating their effectiveness. Political considerations often precede effective reformation and regulation as a result. This discourages markets.
So, all in all, the G8 and G20 will likely add to the fears that markets presently face and encourage more Gold Price rises.
On the other side of the market, there is almost no flexibility in gold supplies. Gold Mining is extremely inflexible, so tends to remain unchangeable in the short-term. Only by inciting sellers to come to the market can new supplies arrive. That takes a price sufficiently high to convince sellers that now is the time to sell. When this selling comes it is called 'scrap' sales.
But scrap supply is only as flexible as the Gold Price rises. Too low, and no scrap sales come through. Too high, and scrap sales can swamp the market. But there are no hard and fast rules to that formula. If the general expectation is for a $1500 price, then hoarders will keep a tight grip on their gold until that price is reached even when they want profits.
What's more, in this day and age, gold owners are holding Gold Bullion and coins, as well as jewelry across south-east Asia and India, as a counter to the uncertainties in other markets. This support is literally priceless!
Put another way, if you want the Gold Price to come down, then regain the confidence of the consumer and rectify the national economy. If you don't, people will continue to buy gold.
Demand is growing through a broadening of Gold Investment demand. In different countries and through new different investors the market is deepening. This investment demand is coming from people in different walks of life. As confidence decays, new investors appear. This type of demand is now controlling the bulk of the market. Where jewelry demand had waned last year, we now see it return to activity, but with its gold content firmly in the buyer's mind. In fact, as gold is not consumed but usually recovered, gold in all uses should be categorized as investment gold.
We continue to believe that new investors will keep coming, and coming over time from central banks right down to Joe Citizen. Their driving reason will be that they want to have gold for rainy days when it can be used to provide value where currencies don't. That force is global and growing!
So will the Gold Price rise short-term? Yes, it will. But beware; there are surprising changes about to happen in the gold market, as we explain to subscribers of GoldForecaster...
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