Gold Forecast for Q1 2011

The gold rally has been impressive. Did you know that? Have you seen any major publications talking up gold? Have you seen an increase in turn your cash to gold businesses? These might be signs that gold may need to take a breather. This does not mean gold needs reverse much of its rally since 2005, when it was still under 500 USD/oz. Today, after a high near 1430 USD/oz, we would be foolish to expect a major reversal now, unless we are clairvoyant. But even without being able to tell the future, we can see some developments that could point to topping for a significant notable correction of the more recent run-ups.

Let's take a look at  some fundamental or internal factors and the technical setup.

Fundamental Factors Affecting Gold:

Let's take a look at the fundamentals that have been driving the prices of precious metals higher this past year as well as some of the pitfalls that may lie ahead.

Let's start with some of the factors that have pushed up the value of gold in the past year. This is an exhaustive list which includes general fear and uncertainty by wealthy individual and institutions following the crash of 2008, the Fed's quantitative easing which along with large US deficits is weakening the confidence in the US Dollar, the sovereign troubles in the euro-zone and the flight to gold as the ultimate currency, central bank purchases, buying by newly wealthy Chinese families, high unemployment in the US, the list goes on.

While most of these factors remain in place, the higher valuation of gold could mean that many of these factors may have already been priced in, and the fundamentals may be shifting for some of the others.

Let's go over some of the bigger items on that list above.

Gold as Inflation Hedge or Protection Against Quantitative Easing and Devaluing Currencies?

Gold, while being used as a traditional hedge against inflation, this past year has climbing higher on another factor and that is the undermining of confidence in fiat currencies. That is of course because of the response by central banks to flood the markets with liquidity and to expand central bank balance sheets to buy up government bonds - what's known as quantitative easing. The largest quantitative easing program is being run by the Fed, which purchased $1.5 trillion of bonds in the "QE1″ starting which began in March 2009. The Fed has embarked on QE2 - a plan to buy another $600 billion, which it is conducting now.