Even though the gold price suffered a sharp drop in September, at the end of the third quarter the yellow metal was trading 8% higher than the previous quarter. Many have taken advantage of the lower prices around $1,610 per troy ounce to enter long positions. Even if some market participants might have lost confidence after this sharp price drop in the precious metal sector, the fundamentals that are underpinning the gold bull market remain unchanged. Due to the escalating European sovereign debt crisis, which could lead to the disintegration of the eurozone, many investors still judge gold to be the safest haven from the storm.
Since the onset of the financial crisis in 2008, politicians have been unable to rectify the huge imbalances affecting the global economy. On the contrary, governments around the planet have exacerbated their existing debt problems by offering bailout after bailout to banks that were on the verge of bankruptcy. Thus, many countries have seen their debt levels rise. Many investors are convinced that the global economy is about to enter a new deflationary phase. Therefore, they are fleeing to US Treasuries and the dollar. After breaking through some important technical chart-levels to the upside in recent weeks, the greenback is gaining value relative to other currencies. The rising dollar is putting a strain on precious metal prices. Silver and palladium are currently suffering the most, as they are important industrial metals.
Due to worsening economic data from the US and China, fears of a global recession have been growing in recent days. Regarding the US, new orders for long-term income producing assets dropped lower than analysts expected. This is a sign that consumption is heavily affected by the problems that are afflicting the country's labour market. In addition, American employees’ average income has fallen for the first time in two years. In September, China's industrial production also weakened for the third consecutive month, standing at 49.4 – below the 50-point mark that represents the dividing line between positive and negative growth. Investors at the commodity markets were greatly concerned about this news, since in most commodity sectors China accounts for 40 to 55% of global demand. This applies primarily to base and non-ferrous metals such as copper, lead, iron ore, zinc, nickel and aluminum.
A drop in Chinese demand could increase downward price pressure on these metals. The effect this situation will have on the future development of the gold price remains to be seen. James Bullard, Chairman of the Federal Reserve Bank of St Louis, commented on Friday that the Fed still has the ability to counter the systemic risks that haunt the US economy. Should the outlook on the American economy keep getting worse, the Fed would be likely to implement a third round of “quantitative easing” (QE3). Last week Fed Chairman Ben Bernanke made similar remarks, reiterating that the Fed will counter any deflationary developments.