Happy New Year! Gold has started 2012 with a bang, hitting $1613 in early trading and expanding on yesterday’s strong performance. This morning’s move has surprised many traders as gold has added over half a percent amid mixed performance in other asset classes.
In and of itself, this move is not necessarily indicative of a pattern change because it still puts the metal comfortably within its 90 day trading range. What is extremely interesting about this morning’s move is that it comes on a day when the Euro and global stock markets are suffering losses. Perhaps this is the first sign of gold decoupling from stocks and the European currency; a step, which is widely assumed will set the stage for much higher prices.
Gold has been stuck trading opposite the US dollar, which has asserted itself as the risk-off asset of choice over the last several months. Precious metals, like other stock and commodity markets, have largely traded in tandem with the Euro, removing much of the safe haven appeal that gold and silver usually enjoy. In short, investors have had little motivation to buy and hold gold over the last several months as it has simply tracked the majority of stock and currency markets across the world.
Today’s movement on the other hand shows quite the opposite. Gold is actually following the US dollar higher and reasserting itself as a risk hedge. This is exactly the signal gold buyers have been looking for, as it indicates that gold may be again acting contrary to other fledgling assets.
Adding more fuel to the gold fire was the announcement that central banks collectively bought over 344 tons of gold through the first 11 months of last year. Even without December’s purchases yet disclosed, this marks a massive increase in central bank buying when compared to the five year average. The affect these purchases will have on global physical gold supply should not be underestimated. It was just three years ago when central banks were still net sellers of gold and represented the largest supply of physical gold injected into the global market each year. To put this shift in perspective, imagine if all the OPEC nations started buying more oil off the international market than they sold. There would clearly be a significant shift in the supply and demand picture. This is essentially what is happening with central bank gold purchases.
Having found solid technical support around $1535, gold still sits in a significantly oversold position. The trading range between the low $1500s and the mid $1700s is still very much intact. That said, a few sessions like this one in which gold bucks the direction of the Euro and reasserts itself as a risk hedge could change everything very quickly. Though traders have soured on the metal over the last several months, their memories are not short enough to forget the near 30% run gold took over the summer months of last year. With precious few assets out there capable of that kind of growth, you can bet the buyers will flock back into gold at the slightest sign of a breakout. If that happens, gold at $1600 per ounce will seem very, very cheap in hindsight.
Mike Getlin is Executive Vice President of Merit Financial, home to America's fastest growing physical gold IRA company. Please send comments or questions to email@example.com.