Every day, it seems, newswire columnists and bloggers come up with reasons for attributing gold price movements - up or down - to various world events - the latest being the news that China has been purchasing gold over the past several years - and the swine 'flu outbreak - both being cited as reasons for the recent gold price rises. While news items such as these can be very short term influences - after all perception moves markets as we have noted here before - the underlying trend is often ignored by those searching for a quick quote.
In the latest gold price scenario it seems to have been ignored by the short term scenario commentators that the global gold price had been rising steadily for the past couple of weeks - before either the China statement or the incidence of the swine 'flu epidemic. Perhaps commentators should look a little deeper.
True, gold has not been performing as many of its proponents have suggested, or predicted - at least in the recent short term. As Jeff Nichols of American Precious Metals advisors noted recently: Those who expected more from gold in the past 12 months, myself included, failed to fully appreciate and anticipate the powerful global forces of supply and demand, forces that have indeed weighed heavily on the metal's price.
We failed to foresee the massive dishoarding of price sensitive old scrap - mostly high-karat jewelry and small bars that are the preferred gold investment media in the Asian and Middle Eastern markets that have always held gold in high esteem.
We also failed to foresee the collapse of gold jewelry fabrication everywhere - in part, particularly in the traditional hoarding markets, because of the metal's historically high price . . . and, in part, because of the great global collapse in personal income, wealth, and consumer spending.
Nichols is almost certainly correct in this assessment. The amount of scrap gold coming into the market due to the high gold price and fears about the global economic crisis, coupled with the virtual collapse in demand from many of the world's biggest gold importers have certainly had a major impact in keeping prices down so far this year. To an extent, this had been countered by an unprecedented flow of metal into the big gold ETFs, but as soon as this inflow ceased with ETF holdings having remained virtually static over the past month, there was an almost immediate impact on prices taking the metal down to below $870.
So what has changed? There are two principal factors which may have caused the price to recover back above $900 even before the China gold reserve news - namely there is anecdotal evidence that the supply of gold scrap to the market is beginning to dwindle, while Asian gold sales, notably in India, the world's largest consumer, are beginning to pick up again with a reported big increase in the past month.
The stock market euphoria resulting from a perception that the worst of the global economic crisis may be over has also waned somewhat as investors assess what the huge government debts which are being built up mean to the global economy in the longer term. Deflation is already with us and there is the prospect of inflation replacing it as the huge increases in money supply begin to impact on the markets. The latest euphemism for printing enormous sums of money to stimulate the economy - quantitative easing - is pure political speak to try and disguise to the general public what this really means. The worst scenarios see hyper-inflation as the natural consequence! We are far from out of the mire yet.
And what of possible national defaults? There are certainly enough countries out there which will need IMF bailouts to perhaps overstretch that illustrious body's capacity to meet their needs. Those that can't print their own currencies to quantitatively ease - like Ireland for example which is part of the Euro zone - could be in dire straits as could many Eastern European countries, while those Middle Eastern states which rely on commerce, rather than oil, for their revenues may also find themselves in serious difficulty.
Seriously adverse economic news is likely to continue with us for some time to come, with each bout spooking the markets yet again and driving investors into gold, and perhaps silver, as both deflation and inflation hedges and as a means to protect a good proportion of their built-up wealth. It is still perceived as the best financial insurance policy out there.
But what of short term impact news items like the China report and swine fever. They do give trading opportunities. China had been building its gold reserves over several year and is only now reporting the fact so the supply/demand impact has actually been with us for some time. Nothing has really changed - except perception.
Swine 'flu is another matter. It could impact on Mexican metals exports, which would have the most significant effect on the silver market, but also important for supplies of gold, copper, lead and zinc among others. If the 'flu spreads then this could impact other areas too. But again this is probably a short term impact - and can also impact on demand as well as supply if infection spreads to major industrialised areas.
So while short term factors like these can influence the market, usually for a couple of days until it's old news again and quickly forgotten, it is the long term supply and demand aspects and, in gold's case, the global economic situation which will likely call the tune for the immediate, and not so immediate, future. These factors remain positive for gold and we wouldn't be surprised, for example, if we see ETF holdings starting to grow again if there is any more overall market disappointment.