With totally contrasting factors in play the gold market seems to be in a state where investors don't know whether to buy or sell.  ETF holdings continue to rise with the SPDR Gold Trust - the world's largest gold ETF - again reporting record levels on the positive side, while on the negative side there is a firm, but perhaps vulnerable, dollar and a total collapse in demand from the world's largest gold consumer, India.

U.S. gold commentator, Jeffrey Nichols, describes this as gold's bipolar disorder (see www.nicholsongold.com ).  With the price of gold lurching first one way then the other says Nichols, it looks like the market has been suffering from bipolar disorder.  I expect this split-personality behavior, characterized by extreme price volatility, to continue for some time to come with big swings up and down -- but, importantly, around a rising trend with support levels moving up step-wise over time.Overall Nichols feels that gold is heading much higher, but not without more struggle and occasional disappointment for those looking for a speedy ascent.  Further out -- over the next year or two -- I have no doubt that gold will move to new historic highs well above the $1030 level touched a year ago March. he reckons.

Nichols is not the only one who is bullish overall on gold though.  Obviously the traditional gold bulls are predicting huge increases in the medium to long term, if not in the near term, but also some of those relatively impartial analysts are looking to significantly higher gold prices.  Notably Goldman Sachs has just come up with a forecast that gold could reach $1000 an ounce again within the next three months.  This is a huge lift from its earlier forecast of only $700 an ounce.  It is unusual for an organisation of this type to make such a drastic change in its published market assessment!

According to Reuters Goldman says in its report The gold price rally has been driven by surging demand for gold in all forms: physical gold, exchange-traded funds, and futures contracts as investors seek 'a safe store of value' amid the financial distress and inflation risks.  The report also noted that a strong relationship between the price of gold in U.S. dollars and the exchange rate of the dollar against other currencies has begun to break down.

This latter point would seem to be quite significant in that for the most part a strong dollar means a weak gold price, but recently gold has moved up significantly despite the dollar remaining strong against most other major currencies.  Indeed gold has seen recent record highs in terms of many, if not most, other currencies.

In a report out today, RBC Capital Markets is also looking to a strong gold price during the year, but with volatile price movements.  Its analysts expect the gold price to remain firm through the first quarter, buoyed by a seasonally strong period for physical demand and continued investment demand due to ongoing financial market concerns. It also expects the gold price to exhibit volatility in 2009, which should result in potentially attractive buying opportunities on pullbacks into periods of weak demand in the second and third quarters, mirroring gold's performance in 2006 and 2007. It suggests that there is risk of a significant June-July period of weakness for gold demand and the potential for rising emerging market scrap sales in an extended global recession. It then expects gold to return to the $1000/oz level later in 2009 or early 2010.

We have just reported here too that Peter Grandich, publisher of the Grandich Letter and a well respected gold analyst who is not always bullish on the metal, feels positive towards gold as an investment.  I believe the best investment right now is gold. Not because I think the world's coming to an end; quite frankly it won't matter if you have gold if there's truly an end-of-the-world scenario. says Grandich. (Gold, oil and Canadian banks plus selected junior miners favored buys - Grandich)

But, with analysts almost falling over themselves to predict a big leap in the gold price we still need to be wary.  Gold can be a very contrary animal and investors have often had their fingers burnt quite severely in the past by either going long or short in the precious metal.  As Nichols notes in his latest assessment Despite expectations of much higher gold prices this year and beyond, it would be wise to remember that gold remains volatile and vulnerable.  We are in an unprecedented environment with daily evidence of a deteriorating U.S. and global economy, where policy makers are employing powerful, yet untested, tools to repair a broken economy, and politicians cannot be trusted to do all the right things.  In this environment, we could still get a quick sell-off that would bring us back to support levels well below recent prices.

As noted above, the Indian demand factor - which is also being mirrored in some other key markets like the Middle East - is potentially a very limiting factor on the continuing rise in the gold price.  While there is a feeling that the demand fall-off in these areas has perhaps been overdone and as the market gets to accept a rerating of the gold price upwards, demand may well pick up, nevertheless this still leaves a short term increase in supply for the investment sector to pick up without exerting any significant shortages in gold availability.  This is likely to limit the immediate upside in gold.

But there are other factors in play too.  Central Bank gold sales have been significantly lower, and evidence suggests they are likely to remain so for the moment.  World mine production continues to decline - a decline which will be made even worse by the virtual unavailability of credit at reasonable terms for many small and midsized miners/explorers.  Certainly exploration has been decimated by the credit crunch which suggests even bigger production falls in the long term.

Key may be currency movements.  Continued upwards movement of the dollar may be a limiting factor for gold, but with virtually every economist predicting that the huge increases in money supply in the US will eventually lead to major inflation, and perhaps a sharp fallback in dollar parities, then this should be extremely positive for the metal.  Most observers feel this scenario is inevitable - but when?  Markets have been defying logic and may well continue to do so.  Investment advance is so dependent on perception and for the moment that is still not as gold oriented as many analysts believe should be the case.  But there does seem to be a general consensus that this is changing - borne out by the rising ETF holding scenario.

On the downside though, this massive ETF holding represents a huge market overhang and if the perception moves against gold for any reason, then this could start coming back on the market with a potentially devastating effect on the gold price.  While the global financial situation remains in turmoil, which it looks as if it will for at least another year or more, then gold will probably remain in demand as the ultimate investment insurance policy, but if other markets really start to recover this could be bad news for the gold price.

So where do we go from here?  To a relatively impartial observer gold would seem to have enough going for it to keep building for the next year or so.  If the momentum remains sufficiently strong, which would probably require a return to higher demand from the traditional gold-buying areas like India, then we could see a rerating of gold at a much higher level of over $1000 an ounce and this level might be able to be held.  However if the gold price just stays at or around current levels then there could be a major fallback if, and when, the world is seen as coming out of financial crisis.  This may well be some way in the future though.