Gold Investment: New Market Shape

Gold Investment demand now dominates the precious-metals market...

WE KEEP hearing from some sources that the Gold Price will tackle previous highs vs. the Dollar, only to fall to $850 an ounce, writes Julian Phillips of the GoldForecaster.com.

We heard this before gold rose to $1100, with many analysts believing that there would then be a correction to $850. But it didn't happen then either. What happened was that gold held its ground, and then broke upwards through resistance to set itself on track for higher prices.

If previous highs are hit – and if a "double top" is formed – then a major correction could come about. But there are two 'ifs' there, which is not solid ground on which to stand.

It is at these times when we bring in the fundamentals. Many will say that the technical picture can stand alone. But in this situation where one can only hope to read a technical picture still to come, that would be dangerous.

Fundamentally, in the last few years, the gold market has changed considerably, switching from essentially a market where there was little investment interest to one where Gold Investment demand now dominates. That investment interest has now reached sovereign wealth fund and central bank level, areas well beyond past market shapes. So the technical patterns now being set are based on a far bigger, differently natured market, too. The technical picture is still very valid, but must be tempered by the new fundamentals. So let's not ignore these changes when assessing future price moves.

One only has to watch the media to see that it is so easy to fall victim to persuasive, if unbalanced presentation. TV journalists in particular have to present a story, one with drama and presence, simply to keep the audience watching. This can easily detract from realities.

For example, hedge-fund manager George Soros was accurately quoted as saying that gold was the "ultimate bubble". But the press interpreted that as him discrediting gold. However, to the contrary he was pointing forward to the future of gold, when it would become the "ultimate" – as in final – bubble.

How do we know? Simply because he has been buying the shares of Gold Exchange Traded Funds and shares in Nova Gold, a gold exploration company. It is more likely that he is Buying Gold with a tremendous Gold Price rise in view. This is now obvious, but to date we have not seen a change in the views on his position. He's read them, better than they read him.

Likewise, we take the technical picture and the fundamental picture together before we come to a conclusion. Here's the scene now...

Gold Investment demand is rising and from old money as well as new. It is buying anonymously and through the Fix in London so as to stay below the radar. Why? The problems of the Euro are not going to go away. They are structural. With national interests clashing with Eurozone interests among all members over money, only words of support are coming forward, no action. Confidence in the Euro is waning, no matter what politicians are saying.

US Dollar problems have not changed and there is little political will to attend to the ailments of the Dollar, riveted as they are on internal matters. The Dollar and the Euro will display a semblance of stability in the days ahead as it is realized they are both gliding down together in terms of confidence.

China is growing rapidly and has become self-sufficient in terms of internal growth. Exports remain important to them, hence the US Dollar 'peg' system they currently operate. Therefore, what they can't afford to do is to let the Yuan rise strongly against all currencies. Yes, we do see an eventual lifting of the 'peg' – but only when the Yuan will not rise strongly against the US Dollar. This can only happen if Yuan are gushing out of China to such an extent that the currency will either fall or hold around current levels.

In such an environment of uncertainty and doubt, it is unlikely that there will be a great exit from gold. It is far more likely that Gold Investment will remain attractive as long as the world is in the present state.

Now look to the Indian sub-continent, where private households are well known for their caution when it comes to Buying Gold. They are very careful not to buy if there is a likelihood of the price falling heavily near-term. Thus they have been out of the market during the bulk of the consolidation we have just weathered. Last year imported gold was extremely low, and the market was supplied to a large extent by scrap gold. Now Indians are turning buyers again. History tells us that they believe we have seen the low around $1050 to $1100 and that price now forms good support.

In addition, Chinese households are inherent savers and have only recently been in a position – and a government-encouraged position, to boot – to Buy Gold. Both nations governments are steady buyers of gold as well. Certainly we would expect the central banks of India and China to treat any fall in the Gold Price as an investment buying opportunity.

So the conditions which would support a major correction in the Gold Price are not present. Should a correction from a failed attack on recent highs occur in such an environment it is likely to be a short one.

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