Gold rallied to a fresh all time high of $1674 this morning as the economic turmoil intensified on both sides of the Atlantic. "For gold this is creating a perfect storm where different drivers come into play simultaneously to create an effect in excess of what have been expected from them individually," says Ross Norman at Sharps Pixley.
Sharps Pixley Comment: Ironically two key positive drivers for gold have fallen away in the last two days - namely the signing of the deal to extend the US debt ceiling plus the agreement on wage increases with the mining unions in South Africa to revert a strike - but this has been insufficient to take the head of steam out if this market.
To some extent the relief from these factors will have been offset by news that several central banks are gold buyers in 2011 including Greece, Mexico, Thailand, Russia and South Korea.This follows purchases of 454 tonnes by China and 200 tonnes by India in 2009. In H1 2011 central banks have purchased just over 155 tonnes of gold which is almost double the 87 tonnes purchased in 2010. This is in stark contrast to the 1990's when Central Banks sold on average 400 tonnes per annum to keep the market in balance.
A decision on whether or not to downgrade US debt from AAA by the leading credit agencies we are told will be decided before mid October. Until then we may expect the pressure to remain. Meanwhile across the pond, Italian and Spanish 10 year bonds remain perilously close to 7% - a figure which some bond analysts suggest could precipitate a further crisis in those countries.
Our Jan 2011 forecast that gold would rise to a high of $1850 was considered by one market commentator at the time to be "positively outlandish" - today it now looks comparatively modest.
Gold is telling us that the actions taken by the authorities on both sides of the Atlantic are insufficient and unlikely to have a positive outcome. It is telling us that something needs to be done politically and economically to give the market reassurance that we are on track to a better future - that said, it is not prescriptive in what those tasks must be.
Our eyes in the coming days will be on the European bond yields and the agreements over the federal budget (a further flash point between Democrats and Republicans on how best to use additional borrowing power). Either could easily trigger significant further gains in the gold price... next stop $1850.
