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.
-by Mike Getlin
Executive Vice President