FU: Gold Screams Higher On Perfect Storm Of Factors
With the gold price again reaching a record high today of US $1,878 — continually close to breaking this at time of writing — and with economic woes seeming to carry on for the foreseeable future, the outlook for gold, in its natural safe haven mode, is strong.
As gold gallops to a fresh record high, it is performing its role in measuring sentiment in the financial markets. In this sense, the tiny gold market is a classic case of the tall wagging the dog. In that regard, gold is telling us that the financial market are under severe strain and it is incumbent on policy makers to pull together clear long-term plans to resolve the crisis.
With $2,000 being one of the louder numbers being “whispered” on peoples’ lips, the potential for the bull-run to step up a gear seems to be more substantial each time a negative story about the U.S. is published. With the world sticking to the saying “When America sneezes – the rest of the world gets sick,” worldwide economic worries would seem to have the wide shoulders to carry gold kicking and screaming to this magic number all by itself.
However, we would then have to contend with a potential gold market bubble, which for a safe haven asset would be dangerous territory indeed. Gold’s major strength in the last 5,000 years has been its stability, its ability to store wealth in times of hardship and protect savings from becoming worthless. At this point, in time, we can see that gold is reacting to a perfect storm of factors in the shape of high demand from China and India, a weakening U.S. dollar, mine supply decreasing year-over-year, sovereign debt crisis in Europe and an increase in worry in the market as a whole.
In the short-term, there will be enough steady interest in gold (from negative market cues) to keep us moving up at the current $1,860 / $1,880 range, but unless there is a new major crisis popping up anytime soon, we feel that gold is currently over-brought and should see a small correction. However, as with most perfect storms, there is always an air of uncertainty that underlies most systems, and a single factor such as more countries following Venezuela's lead or yet more debt downgrades, could easily push gold closer to $2,000 this year.
The markets are awash in a sea of red numbers (FTSE down 2.7%, NASDAQ down 5.22%, S&P 500 down 4%) and with continuing knocks to the confidence of investors, the gold prices of the past will be a distant memory, even the first Gold Fix of 2011 seems strange to look at as its only US$1,410. If someone told me that 10 years ago the gold average used to be around $260, I would call them a liar (and then secretly check on Google to see if it was true).
