Gold Moves Up, But How Short-Lived This Time?

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"This has been quite a sharp run up and could have legs if the dollar weakness continues."

For virtually all of the past month, gold has been trading between $930 and $970, finding it impossible to break out in either direction. The perceived strength of the dollar has been the primary driver and with the biggest European economies, France and Germany, showing signs that they may have turned the corner, while the U.S. economy is still seen as declining, albeit at a much slower rate and possibly bottoming, the dollar is experiencing another spate of weakness in the currency markets.

Occasional spurts in dollar strength see the gold price declining to near the bottom of its recent trading range, while dollar weakness sees upward surges and we have been in one of these in the past couple of days. This has been quite a sharp run up and could have legs if the dollar weakness continues.

Besides the dollar, other external factors could be affecting the price both adversely and positively. For example Switzerland has announced it has completed its gold sales program to sell 250 tons of the yellow metal (over the past two years) all within the auspices of the Central Bank Gold Agreement (CBGA)—something seen as positive by the market notwithstanding that the sales were actually completed sometime back. Another fillip may have come from South African gold production being down 12.2% year on year in June.

Other factors affecting the gold price at the moment include the perception that Indian demand is beginning to pick up a little with the wedding season approaching and the new CBGA (wherein the amount of gold participating banks can sell has been reduced by 100 tons a year).

Nevertheless the dollar is the principal price driver; but whether this weakness is sufficiently strong to propel the gold price through $970 and upwards remains to be seen. It may well be 'onwards and upwards' for gold, but the upwards side may yet be a little muted and slow. But gold confounds. We shall see.

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