We are hearing from some sources that the gold price will tackle previous highs, and then fall to $850. We did hear this before gold rose to $1,100, with many believing that then there would be a correction to $850, but it didn't happen then either. What happened was that gold held its ground then broke upwards through resistance to set itself on track for higher prices.
If previous highs are hit, and if a double top is formed, then a major correction could come about. But there are two 'ifs' there, which is not solid ground on which to stand.
It is at these times when we bring in the fundamentals. Many will say that the Technical picture can stand alone. Well in a situation that has to read a Technical picture still to come, that would be dangerous.
In the last few years the gold market has changed considerably from essentially a market where there was little investment interest to one where investment interest dominates the market. That investment interest is now at Sovereign wealth fund and central bank level, areas well beyond past market shapes. Past shapes defined the Technical patterns we now see. Technical patterns that are now being set are based on a far bigger, different natured market too. The Technical picture is still very valid, but must be tempered by the new fundamentals. So let's not ignore these changes when assessing future price moves.
One only has to watch the media, written and watched to see that it is so easy to fall victim to persuasive, if unbalanced presentation. TV journalists in particular have to present a story, one with drama and presence, simply to keep the audience watching. This can easily detract from realities. For example, Mr. George Soros was accurately quoted as saying that gold was the ultimate bubble. The press interpreted that as him discrediting gold. However, to the contrary he was pointing forward to the future of gold, when it would become the ultimate bubble. How do we know, simply because he has been buying the shares of gold ETFs and shares in Nova gold, a gold exploration company? So it is more likely that he is buying into gold with a tremendous gold price rise in view. This is now obvious, but to date we have not seen a change in the views on his position. He's read them, better than they read him.
Likewise, we take the technical picture and the fundamental picture together before we come to a conclusion. Here's the scene now:
- Investment demand is rising and from old money, as well as new (see our forecast on European institutional and retail demand for 2010). It is buying anonymously and through the Fix in London so as to stay below the radar. Why?
- The problems of the are not going to go away. They are structural. With national interests clashing with Eurozone interests among all members over money, only words of support are coming forward, no action. Confidence in the is waning, no matter what politicians are saying.
- USD problems have not changed and there is little political will to attend to the ailments of the USD, riveted as they are on internal matters.
- The USD and the will display a semblance of stability in the days ahead as it is realized they are both gliding down together in terms of confidence.
- China is growing rapidly and has become self-sufficient in terms of internal growth. Exports remain important to them, hence the USD peg system they currently operate. Therefore, what they can't afford to do is to let the yuan rise strongly against all currencies. Yes, we do see an eventual lifting of the peg, but only when the yuan will not rise strongly against the USD. This can only happen if yuan are gushing out of China to such an extent that the currency will either fall or hold around current levels.
Now look to the Indian subcontinent. Indians are well known for their caution when it comes to buying gold. They are very careful not to buy if there is a likelihood of the gold price falling heavily. They have been out of the market during the bulk of the consolidation we have just weathered. Last year imported gold was extremely low and the market supplied to a large extent by scrap gold. Now they are turning buyers again. History tells us that they believe we have seen the low around $1,050 to $1,100 and that price forms good support. In addition the Chinese are inherent savers and have only recently been in a position and a government encouraged one, to buy gold. Both nations' governments are steady buyers of gold as evidenced of late. Certainly they would treat any fall in the gold price as a buying opportunity.
So the conditions which would support a major correction in the gold price are not present. Should a correction from a failed attack on recent highs occur in such an environment, it is likely to be a short one.
What are the likely price moves of gold going forward?
2010 gold prices forecast. For Subscribers only We are in the process of forecasting prices in 2010 in—Chinese retail demand—Indian retail demand—European retail and Institutional demand—U.S. retail demand.
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