By Kishori Krishnan Exclusive To Gold Investing News
Dump your gold and lick your wounds. Don’t do it in private though. There are lots of folks out there in a similar position. The Fed is bound to raise rates sooner than you think, and gold has peaked.
Muted investment demand, coupled with a change in market sentiment and a projected large oversupply in the supply equation, all point to a downward correction in gold prices from the highs reached at the end of 2009.
The gold price plummeted a monstrous $49 to close at $1062.40 on the Comex. Apparently, overnight the Euro was hammered over worries the currency might break up from fiscal mismanagement in the southern countries. That drove the US dollar up 55 basis points to touch 79.921. That posed problems for both silver and gold.
Unemployment continues to be in double-digit territory, credit still is tight and consumers are refusing to part with their cash. One thing is obvious - Washington’s first bailout did nothing but put the nation even further in debt and give China an even larger stake of the country’s financial future.
Gold has broken through the $1,085-$1,075 support level and will drop much further in an extended correction from here.
As the dollar continues to do its ditty, there is clearly no way out. Added to that are debt concerns facing Greece, Portugal and Spain, which have resurfaced, pushing the dollar higher versus the euro.
Commodities, including oil and gold, are priced in dollars, and a firmer greenback weighs on prices.
“I think there is a lot of disappointment that the economy is not recovering as briskly as it has from prior recessions,” said Tom Pawlicki, analyst at MF Global in Chicago. “US growth has been steady, while European economies are weakening.”
If the debt crisis sweeping southern Europe deepens, then the dollar’s good start to the year will get better.
“We saw a correction from [gold's] highs yesterday as people want to wait for Friday’s non-farm payrolls data,” said Ronald Leung of Lee Cheong Gold Dealers, in Hong Kong, speaking to Reuters ahead of the London opening.
New York’s S&P stock index lost 2 per cent on jobs data. London’s FTSE100 extended its drop to touch last week’s 3-month low of 5,145.
On a technical analysis of the Gold Price chart, says Heraeus head of trading Wolfgang Wrzesniok-Rossbach, “There is good support at $1075 an ounce, and this would again be a good level for industrial buyers to stock up on the metal.”
The yellow metal produced a hefty 27.1 per cent return last year as prices jumped from US$ 862.20 per ounce in January 2009 to a high of US$ 1,212.00 an ounce on December 3, before easing slightly to close at US$ 1096.00 by the end of December.
At one point, there were several rumours and analysts predicting that prices could reach US$ 2,000 - even US$ 3,000 - for one ounce of the metal.
Of course, there were a number of rationales put forth to explain gold’s price rise and why it would continue to appreciate going forward. But, where exactly are those guys now when gold appears to dimming in lustre?
Like Peter Krauth, contributing editor of Money Morning who had reported that gold would hit $5,000. (yelp!)
“Granted, there’s no guarantee that we’re about to duplicate the 1970s. (I could certainly do without the disco, bell bottoms and leisure suits). But as Mark Twain once noted: “History does not repeat itself, but it often rhymes.”
And that could mean even sweeter returns for gold investors this time around,” is what he said in this post.
Peter Krauth: Hear any bells lately?
Or even Eric Sprott, whose Sprott Hedge Fund increased more than fivefold in nine years. He said gold may rise to $1,500 an ounce this year and $2,000 within two years as the US government takes measures to counter the credit crunch.
Sprott’s C$ 1.39 billion ($1.3 billion) Sprott Canadian Equity Fund, which has gained about 18 per cent in the past six months, has 34 per cent of its portfolio in mining stocks and another 39 per cent in bullion as of November 30.
The Editor isn’t alone in his investment thesis and his play for gold.
In a recent interview, author and global-investing guru Jim Rogers had said that “during the course of the bull market [gold] is going to go much higher, it is certainly not a bubble yet.”
To underscore his point, Rogers said that “I don’t think this is the top.”
Victor “Trader Vic” Sperandeo, whose 40 years of market experience has included stints with George Soros and Leon Cooperman has also gone on record, “as saying that gold is the best investment in the world for the next two to three years. If you go back to its lows, and you compound where [gold] is today, it’s about 6.5 per cent compounded. That isn’t a bubble.”
Another point to note - The massive amount of stimulus that has flooded the system is set to translate into higher inflation. And rising inflation is gold’s best friend.
The inflation premium - measured as the difference between the yield on US 10-year Treasury Inflation Protected Securities and the regular US 10-year Treasury bond yield — has eased slightly after a sharp rise towards the closing months of last year.
This is not consistent with the sharper fall in the price of gold in recent days though and needs to be examined closely for any fall in the yellow metal.
Gold appears to be confirming the slow growth theory put out by certain analysts and therefore benign inflation in its weke. But with central banks on the gold accumulation wagon, the balance of probabilities continues to support a strong gold price.
China may or not be a bubble about to burst, we do you think they are going to unload their gold in preference to their dollars? We think not!
India is reported to be likely to increase substantially its gold purchases as they get used to the higher prices and scrap recycling is drying up. There is no sign of their traditional feelings for the metal being eroded.
It is just a question of getting used to the new price plateau reached in 2009. It is probable that they will have to get familiar with substantially higher prices by the time the next wedding season arrives in August.
Asian central banks are not expected to ignore gold, either. Chinese and Indian central banks remain extremely underweight gold, with only 1.5 per cent and 4.1 per cent of their total reserves in the precious metal. That compares to the European average of 54 per cent.