Gold opened slightly lower this morning before making up lost ground to move into positive territory. Silver added 35 cents per ounce this morning to break $31 for the first time in 2012. Housing data released this morning showed US existing home sales on the rise, which has combined with corporate earnings to make a strong argument that the deflation threat is behind us. As such, gold is responding and finding stable footing towards the higher end of its trading range.
At the moment, gold is still stuck holding hands with the Euro. Though cracks have begun to appear in their relationship as of late, there has yet to be the game changing bit of news that can break gold free of the Euro and equities. From a technical standpoint, gold has created an extremely solid base in the low $1600 range and is well poised for another run. With this ultra-strong technical footing a breakout in gold is likely to be seen as a rare opportunity for institutional traders who would have the power to drive prices through the roof, the same way they did last summer. The question is what will kick start the gold engine and drive the metal back toward new highs?
First, any good news out of Europe will be very price positive for gold. Though good news is usually gold’s enemy, a stronger outlook for Europe would serve to poke a hole in the developing dollar bubble. The mass amount of cash flow into US treasuries is not sustainable, and investors know this. If there is an indication that the dollar could suffer a significant slide at the hands of a stronger Euro, the rumor may be enough to douse the dollar and drive gold much higher. This effect would be multiplied by a euro zone solution that is seen to be “inflationary”, such as further bond purchases or adding to their financial security (bailout) fund.
Second, we expect demand out of China to continue to increase. Underpinning any investment driven move in the gold price you will usually find strong physical demand. At the moment, the Chinese are soaking up physical gold at an alarming rate. Though buying has cooled slightly in the last month, there is little doubt that the Chinese know the importance of gold and will continue (both publicly and privately) to accumulate the stuff. An announced resurgence in Chinese buying could be the tipping point gold needs to begin the next run.
Finally, any hint at rising prices here in the US could shoot gold higher very quickly. When all is said and done, the majority of the investment demand for gold over the last few years has come from fears of long term price instability and inflation. With the massive amounts of money created and injected into the system, there is little doubt that inflation will raise its head at some point. The question is when will that be? For fear of getting caught napping, investors are likely to react very quickly to strongly inflationary data. This too could be the next major driver for gold.
One more little tip: While premiums on gold bars and many international bullion coins have been very stable over the last year, premiums on Gold Eagles and especially on certified American coins are near all-time lows. If you’re looking for a discount on top of the bargain already offered by the gold correction, ask around about US gold. It’s cheap and may not be for very long.