After a meteoric rise this summer and subsequent correction last month, gold seems now to be finding firm footing in a relatively wide trading range. The metal traded as high as $1654 this morning, before settling back down near yesterday’s close of $1643. This stability is a welcome reprieve for many long term investors who have been riding the swings up and down in hopes of some indication as to when gold will resume its march upward.
One of the issues obstructing gold’s path to $2000 and beyond has ironically been exactly the same mechanism that helped drive gold to these high levels over the last two years: The European debt crisis. As traders and investors have been scrambling for some indication of whether or not EU leaders will be able to stave off complete and catastrophic economic collapse, the dollar has benefited handsomely. As concerns rise and fall regarding the future of the EU, investors have transferred wealth into dollar denominated assets to protect against short term crisis.
Though gold typically fares well in times of uncertainty, the higher US dollar has hurt gold demand in the short term. No one is making an argument that the dollar is the smart play for the long haul, but it is still seen as the place to park money for the week while waiting for the next announcement from…whomever.
Gold has also suffered from its own success. As securities markets have done little to impress this year, gold has continued its epic rise giving ample opportunities for speculators to jump on the train. And jump they did during the summer, driving massive price increases. When the global selloff began last month, many speculators were forced out of their long positions by their need to raise capital for other failing investments. This caused some serious sell pressure, which was made worse by short side speculators jumping in to drive prices down even further. This speculative chain reaction has been the main cause of instability in the gold market through the last month.
Now it seems much of the short term speculative money has been removed from the market, being slowly replaced as it always is by physical demand. As the gold market settles into this trading range, it should begin to establish a more solid base from which it can re-launch its attack on the $2000 level.
The timing of the next rise is still very much in question. It will depend heavily on what happens in Europe over the next two months. A full-fledged Greek default could add significant risk premium to the market as investors run to gold for safety. It’s important to note that this flight to gold as a safe haven is a much more appetizing move now that it has consolidated and shaken out some of the short term speculators. Either way, most industry experts are back in accumulation mode when it comes to gold positions. Without any new bearish news, the consensus is that a lot of the instability is likely behind us.
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.