Nervous Money Will Limit Gold's Downside Risks

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"The big trouble with gold is that it is virtually impossible to predict price patterns on normal supply/demand fundamentals. . ."

There is no shortage of advice for the gold investor available on the Internet and much of it is wildly contradictory. There are those predicting a crash as the price has come off the boil, while others predict heady heights ahead.

The big trouble with gold is that it is virtually impossible to predict price patterns on normal supply/demand fundamentals as there are so many unknowns on both sides of the equation. One fundamental that can be defined is that of gold mine production, which is seen to be static, or slightly falling, but the other main supply-side item—scrap sales—tends to be a speculative assessment of how much will be unleashed by the current high gold price levels. The prospect of Central Bank sales has also tended to overhang the market and suppress prices and this is yet another area of uncertainty.

The demand side, though, is virtually all purely speculative assessment and thus can be tweaked depending on the underlying views of whichever analyst or commentator is making his/her prediction of where the gold price is likely to head. . .There are obviously underlying factors which can, and will, influence the path of the gold price, but these themselves are not necessarily wholly predictable. These include the Central Bank purchases or sales, ETF investment, gold coin and bar sales and, perhaps most importantly the strength or otherwise of the U.S. dollar.

Yes there has been a huge speculative element in the rise in the gold price, which has taken most mainstream analysts by surprise—but surely the question is whether this element will continue to support the market, or just fade away and leave gold out on a limb.

Much of the speculation has been due to the so-called "safe-haven investment" aspect of gold. One suspects with perceived further economic trials facing the markets ahead, much of this nervous money will remain with gold, limiting downside risk.

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