Gold – an interesting week to miss
After a dramatic dip on April Fool’s Day, the gold price has been recovering slowly, but nervously.
by Lawrence Williamsmineweb.comTuesday, April 8, 2008 LONDON -
What a difference a week can make. At the end of March I went away on holiday to a place with limited internet access. On the day I left gold was trading at around $930 an ounce and on my return the yellow metal was back over $920, although somewhat nervously. Not a huge difference - but, what happened in between and where do we go from here?
As those who were not stuck without good internet or news access will well know, gold plunged back to its lowest levels since early February with most of the fall taking place on April 1st - April Fool's Day! The question is who will be the fools - those that rushed in and bought on the fall, or those who liquidated holdings in fear that a 1980 type plunge was again imminent?
At the moment, it certainly looks like those who sold at that level may be regretting their decisions. The plunge was largely on signs of dollar strength, although these have proved to be short-lived with new economic data pointing to further rate cuts and weakness still in the pipeline. The R word is now openly spoken in the US, although expectations are that although a recession may technically be in place that it is likely to be shallow, if not particularly short - and there is little doubt that because of the size of the US economy and its effects on its main trading partners there will be repercussions around the world. Japan is very much feeling the squeeze already for example and some European economies are decidedly more shaky than they were a few months ago.
The subprime crisis certainly has further to run - although the strength in the Chinese and Indian domestic economies has taken the heat out of what is happening in the West and commodities in general have been remarkably resilient.
What we are seeing, particularly in the gold market, is a degree of volatility seldom seen before. Big moves in the price can occur extremely rapidly, both on the up and on the down trends, and most of these are dollar driven defining gold's primary position as a definer of dollar strength and weakness.
External factors can come into play which also tend to have a temporary additional impact - such as Central Bank sales. The latest of these are the continued utterings from the IMF that it intends to sell just over 400 tonnes of the metal, although this is hardly news, and if such sales do occur (they still require a number of approvals including that of the US Congress) they are to be spread over several years to try and avoid disrupting the overall gold market - or so we are led to believe.
The fact is though that the world economy is in a mess, largely through interruptions in the flow of credit, coupled with the US economic downturn and its worldwide impact. The dollar remains weak and although further falls may be limited, the overall impact on the gold price should remain positive.
There are also signs that sales into the jewellery sector, which were becoming almost dormant on the big price upturns, have been picking up on any signs of weakness and that this sector is now accepting that prices in the current range are acceptable, helping underpin the overall market.
So - what can we expect? Further volatility for sure. The markets are exceedingly nervous. More big falls in stock prices may drag the gold price down as holders struggle for liquidity, but this tends to be a temporary factor as the ‘safe haven' element comes into play. Maybe it will take time for gold to get back to $1,000 again but one suspects the odds are that it will. When the move comes it may be rapid leaving the nervous players behind - but that is the nature of the market in times of economic uncertainty of the type we are seeing now.
As we have noted before, the gold price, in US dollar terms at least, is largely a function of the latter's strength or weakness. ‘Weak dollar - strong gold' should be the mantra and with further US Fed rate cuts seeming likely to try and kick start the US economy again there looks to be further dollar weakness ahead. But beware - should the US Fed succeed in stemming the downturn and the dollar begins to pick up again, then the gold price strength we have seen over the past few years would likely flatten and fall back - although this still looks some way away.
After a dramatic dip on April Fool’s Day, the gold price has been recovering slowly, but nervously.
by Lawrence Williamsmineweb.comTuesday, April 8, 2008 LONDON -
What a difference a week can make. At the end of March I went away on holiday to a place with limited internet access. On the day I left gold was trading at around $930 an ounce and on my return the yellow metal was back over $920, although somewhat nervously. Not a huge difference - but, what happened in between and where do we go from here?
As those who were not stuck without good internet or news access will well know, gold plunged back to its lowest levels since early February with most of the fall taking place on April 1st - April Fool's Day! The question is who will be the fools - those that rushed in and bought on the fall, or those who liquidated holdings in fear that a 1980 type plunge was again imminent?
At the moment, it certainly looks like those who sold at that level may be regretting their decisions. The plunge was largely on signs of dollar strength, although these have proved to be short-lived with new economic data pointing to further rate cuts and weakness still in the pipeline. The R word is now openly spoken in the US, although expectations are that although a recession may technically be in place that it is likely to be shallow, if not particularly short - and there is little doubt that because of the size of the US economy and its effects on its main trading partners there will be repercussions around the world. Japan is very much feeling the squeeze already for example and some European economies are decidedly more shaky than they were a few months ago.
The subprime crisis certainly has further to run - although the strength in the Chinese and Indian domestic economies has taken the heat out of what is happening in the West and commodities in general have been remarkably resilient.
What we are seeing, particularly in the gold market, is a degree of volatility seldom seen before. Big moves in the price can occur extremely rapidly, both on the up and on the down trends, and most of these are dollar driven defining gold's primary position as a definer of dollar strength and weakness.
External factors can come into play which also tend to have a temporary additional impact - such as Central Bank sales. The latest of these are the continued utterings from the IMF that it intends to sell just over 400 tonnes of the metal, although this is hardly news, and if such sales do occur (they still require a number of approvals including that of the US Congress) they are to be spread over several years to try and avoid disrupting the overall gold market - or so we are led to believe.
The fact is though that the world economy is in a mess, largely through interruptions in the flow of credit, coupled with the US economic downturn and its worldwide impact. The dollar remains weak and although further falls may be limited, the overall impact on the gold price should remain positive.
There are also signs that sales into the jewellery sector, which were becoming almost dormant on the big price upturns, have been picking up on any signs of weakness and that this sector is now accepting that prices in the current range are acceptable, helping underpin the overall market.
So - what can we expect? Further volatility for sure. The markets are exceedingly nervous. More big falls in stock prices may drag the gold price down as holders struggle for liquidity, but this tends to be a temporary factor as the ‘safe haven' element comes into play. Maybe it will take time for gold to get back to $1,000 again but one suspects the odds are that it will. When the move comes it may be rapid leaving the nervous players behind - but that is the nature of the market in times of economic uncertainty of the type we are seeing now.
As we have noted before, the gold price, in US dollar terms at least, is largely a function of the latter's strength or weakness. ‘Weak dollar - strong gold' should be the mantra and with further US Fed rate cuts seeming likely to try and kick start the US economy again there looks to be further dollar weakness ahead. But beware - should the US Fed succeed in stemming the downturn and the dollar begins to pick up again, then the gold price strength we have seen over the past few years would likely flatten and fall back - although this still looks some way away.
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