As we wind down the year gold and silver have both been relatively quiet following the Christmas holiday with low volume and thin trading. Prices have stabilized just under $1600 per ounce. Assuming no large scale moves before the end of the year, gold will have posted its tenth straight year of gains, tacking on over $200 per ounce year to date.
2011 has seen both new highs and heightened volatility in the gold market. In the opening months of the year revolutions and unrest in the Middle East dominated global discussion. Concerns about oil supplies being interrupted by the “Arab Spring” helped push the entire commodities sector higher through the first half of the year. Gold followed in suit, rising from the low $1300’s to nearly $1550 by May.
The months of May and June were relatively quiet as gold’s “summer vacation” came a bit early this year. It wasn’t long before the uptrend developed again and set the stage for gold’s most impressive month over month performance to date. As concerns about European debt came back to the forefront in July gold moved sharply to the upside, assisted by the shameful debt ceiling debate here in the US. As politicians haggard both here and across the Atlantic, gold skyrocketed, tacking on more than $400 per ounce in less than 70 days. An all-time intraday high of $1924 per ounce was struck in early September, before prices began to subside again into a corrective stage.
With the debt ceiling debate tabled here at home and the crisis in Europe escalating, a major shift occurred in global investment strategies in the last quarter of the year. Whereas the US dollar had been under attack from all sides for months, the Euro reemerged as the new kid to pick on as debt contagion concerns continued to cause significant damage to risk appetites worldwide. Strangely enough, the decrease in risk appetite actually harmed gold significantly as the US dollar became the main beneficiary of economic uncertainty. As a result of the turmoil in Europe, the US dollar rallied to pre-2007 levels in the last quarter of the year, driving gold back down into the consolidative trading range between $1550 and $1700 in which we find it today.
So what’s in store for gold in 2012?
As we have said time and time again, there are only a couple things we can be certain of: Gold will go up, gold will go down, and the volatility we have seen will probably continue through the foreseeable future. At this point, gold has formed a very strong support platform at $1550 per ounce, which has been tested and held. There is also significant resistance around $1700 per ounce, which has also been tested and has held. Thus, we will need an overall change in the market environment before gold breaks this trading range in either direction.
That said, we are very, very ripe for a change. Here’s why: These levels for the US dollar are simply not sustainable. The dollar index sits today at 80.37, which represents a valuation even higher than the levels seen before the subprime meltdown. It represents a level seen when our national debt was less than HALF of what it is today. It represents a level seen when our government was still capable of completing basic tasks with some level of efficiency. Though some traders have confidence that the dollar will continue its strong performance in the very near term, there is nothing to indicate that these levels are sustainable for the long haul.
There are only two factors that have the power to reverse the bull market in gold. One is a sky high dollar and the other is sky high interest rates. In 1980, it took interest rates above 15% before the bull market in gold turned around. This year, the Fed has pledged to keep them essentially at zero through the end of 2013. Thus, interest rates pose no threat to gold over the long term.
The dollar on the other hand is a bit more of a mixed bag. Gold needs a softer dollar before it will find good footing for the next up leg. The question is when will this irrationally overbought dollar finally fall off its pedestal? Truth is that nobody knows. It could happen tomorrow, or it could take months. There simply is no way to know.
What we do know is that when this happens gold will surge higher as it has numerous times throughout this bull market. The last time we saw a dollar induced trading range like this was in 2008. Let’s not forget that once gold broke free then, it doubled in less than 24 months. If that happens again, we would be looking at $3000 + gold by the beginning of 2014. For now, let’s just keep an eye out for cracks in the dollar. With the upcoming election, the mounting debt, the political gridlock, and the broken fiscal policies in this country, those cracks shouldn’t be too hard to find.
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 firstname.lastname@example.org.