Factors Driving the $1200 Gold Price

How Gold got to $1200 and what could support it now...

AFTER ALERTING our subscribers at $1050, and again at $1150, that gold was turning up while others were pointing to a downturn, it's important to review the 'why' of the matter, writes Julian Phillips at GoldForecaster.

After all, the Greek problem has been around for a while now. So has the potential drama from East European countries, plus the poor quality pace of the Greek bailout...the global sovereign debt problem...and the fact that the US could be right in there too.

Then there are the worries over the global economy. Is it going to be a double-dip recession, or has growth really found traction? Uncertainty and falling confidence is now the norm!

Why did the crisis hit now? Call it 'realization', call it 'coming out of denial', the impact of the sum total of the problems is summed up in that old saying, "He who sows the wind, reaps the whirlwind". It is being called the "contagion" danger, but it is simpler than that.

In the markets, when a pennant formation builds up around a narrowing trading range, buyers and sellers move to a point where they are equally balanced, then like a see-saw, the slightest additional weight either side tips the balance, one way or the other. That's what these crises are like. But on top of that, once it tips say to the buying side, the sellers become buyers then momentum builds up. So does panic and fear. You can smell it. That's what we're seeing right now.

Fears that Greece just does not have the competence or capacity to rectify their debt position are gaining ground. They have addressed the smaller but similar problem of austerity before, but to no avail. Spain, even though it is no longer in recession, just does not have the economic structure to repay its debt, not under current circumstances. Ireland, Italy, the UK and the US could fall into the same category.

It's becoming a world-wide problem, in fact, with China and Germany and other surplus countries the only ones able to supply the funds (unless more debt is issued and bought directly by central banks). So it's a structural problem...rather like a bank creditor not having the ability to increase cash flow, while cutting costs. He can promise anything he likes and raise interest levels as high as he likes, but all he does is send out distress signals.

In our pages we warned that such problems would bring social consequences and here we are. Debt financing, without a convincing way to repay that debt never ends happily. All the promises do is to confirm desperation. Certainly, that's what the markets are telling us right now.

We have also warned of a de-coupling of the Gold Price from the Euro/Dollar exchange rate for several months, and we are seeing it now. With gold over $1200 an ounce – and the Euro back to late 2004 levels vs. the Dollar at $1.30. The reason is not Dollar strength but Euro weakness. The panic in the markets is because of fear and uncertainty for the entire global currency system, added to the sovereign debt problems.

The UK is now saddled with a 'hung' Parliament, and so Sterling is in the firing line, too. It's possible that, with a currency of its own, outside the Eurozone, Sterling will fall heavily. A re-introduction of the "Dollar Premium" is possible as the UK returns to 1970s-style capital controls.

That's why we are now seeing the Gold Price at record levels in all currencies.

Gold investment demand from central banks, to funds, to institutions, to wealthy individuals, is driving the price as fear and uncertainty mount. One commentator said that "when the fear subsides the Gold Price will fall". But fear, when it runs deep, scars the fearful. It takes a long time to lose that fear. Sometimes it takes years. And that's the investor.

On the other side, fear only subsides if there's good cause for it to do so. In this case, the sovereign debt problems have to go away first. What will this take? First, debt levels have to be reduced and economies re-structured so that this can happen. Then, the currency markets have to be reformed, so that exchange rates don't move as wildly as they are now. If successful, calm will return, but even then, it'll take years for confidence levels to recover to what they were.

From now on we believe that a growing number of weekly investment strategy meetings will recommend that a percentage of funds be held in gold for the long-term. This will ensure that the Gold Price will hold $1200, we believe. Central bank demand alone is capable of ensuring that the Gold Price is underpinned. New buyers will have to pay a rising price.

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