Gold Price Fall Sets Up Bulls vs Bears Contest

Which side are you on...?

BACK IN AUGUST, everything seemed to be going so well for the Gold Price bulls, writes Lawrence Williams of MineWeb.

Gold was riding high at new records at a time of the year when traditionally precious metals prices are weak, with the main 'buying seasons' ahead.  Everything seemed set fair for a run up to the $2,000 level, or higher, in the historically strong winter months then to come.  Yet what has happened? Instead of reaching new heights, gold fell back and stalled around the $1,700 level and now has seen another big drop into the $1,500s. 

The bears are currently crowing (if bears can be said to crow) – few more so than Nouriel Roubini who, among a number of others, once got lucky with a prediction and has capitalized on it ever since, and who has used twitter to express his disdain for the gold bulls, as noted by Geoff Candy in his recent commentary here – Battle lines drawn in Gold Price direction predictions.

The mega gold bulls have been predicting big things for gold throughout – and undoubtedly will see the latest downturn as a major buying opportunity.  But to be fair even some of those who have been bullish on gold right through did warn of possible retracing of the price by 20% or more back in the summer, although they see this as a natural correction in an ongoing bull market.  

Indeed gold has fallen back around 20% from its peak, although is still up on the year, and the bulls will maintain the gold bull market remains intact.  The question is whether the price will hold firm at or around current levels, pick up, or fall still farther.

While the media reports technical factors and year-end fund sell-offs as being key in the latest downturn – one gets the impression that these are just the excuses wheeled out by the mainstream media to try and make sense of Gold Price movement  which is little understood even by some of the so-called experts.

Gold is worth what people are prepared to pay for it which means the price revolves around perceived sentiment among those who may have the power and the wealth to dictate prices.  But in all honesty the actual daily market in gold is tiny compared with what is out there available to the market. Thus the frightening thing for the gold bulls is that if sentiment truly moves against gold then there could be a big sell-off from the ETFs in particular which could turn into a panic selling scenario.  This is what the 'gold in a bubble' merchants have been preaching for the past ten years!

So far though, the ETFs have seemed to be holding reasonably firm – and in the light of the global economic situation may well continue to do so.  Much of the recent price fall has been a move to the US Dollar as the currently preferred safe haven in the light of the heavily highlighted Eurozone debt crisis – which is indeed still far from over.  What has been disregarded though, much to the relief of the US financial authorities, is the parlous state of US debt which may well hit the headlines more as municipalities – and perhaps some states – are forced to default on their commitments.

So before writing off gold altogether, those betting against it should remember that gold tends to thrive on financial uncertainty – and there is likely to be plenty of that still ahead.  If the Dollar begins to slip again, as many predict, then gold will likely recover – but perhaps not as fast as the out and out gold bulls might suggest.

And what about silver?  Silver saw its big surge earlier in the year, and then came back very sharply, but because its price movements in general follow that of gold, but in a more volatile manner, it has now taken another serious knock along with the latest Gold Price downturn, just after beginning to make something of a recovery from its earlier price collapse.  While gold, even after the latest big fall, is still around 13% up on the year to date, silver is roughly back where it was at the beginning of January with investor confidence in it shaken by the April/May crash, even though at the time the fall did smack of manipulation in the market. 

Silver is not gold.  It has far more industrial uses than its big brother and is thus more prone also to the vagaries of the economy in general.  Gold is still very much a monetary metal.  Silver, despite its proponents' protestations to the contrary, has not been such for some years now and seems unlikely to revert to any kind of serious monetary role in the foreseeable future.  Even so, it is still likely to track gold and, should gold make a strong recovery, there could be life in the silver price yet – particularly as its industrial uses seem to be on the up and up – see Silver demand growing with old and new uses .

On balance, the fundamental factors which have been driving gold onwards and upwards for the past several years all still seem to be in place and on those grounds the current fall could well prove to be just a major, and perhaps overdue, correction with the price having overreached itself in August/September.  However should the confidence of supposed long term investors in the metal waver this could yet become a rout.  The next few days may well determine the short term path of the Gold Price – and by association also for that of silver, platinum and palladium which all tend to follow gold's lead to a greater or lesser extent.

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