Gold price hiatus slows overall rate of increase
The market has taken a longer pause for breath from its heady rapid
runup to $840 only a couple of weeks ago but the overall uptrend should
still be in place.
Author: Lawrence Williams
20 November 2007
LONDON
Gold investors' memories are short. At the beginning of the year most gold
investors and gold miners would have been more than happy could they have
foreseen a gold price level of around the current levels with the metal then
languishing at a little over $600 an ounce - a level which proved to be the
low point for the year. But when the yellow metal soared up through $840,
expectations, including our own, were for even higher levels by the year
end.
But, as was perhaps inevitable in retrospect, a serious hiatus set in and
the price has drifted back to current levels where it appears to have been
finding reasonable support above $770.
What has happened to cause the price setback? Profit taking certainly.
Probably the view that the dollar decline - in our view the principal cause
of the runup in the gold price - may be getting out of hand and that Central
Bankers will be attempting to slow the greenback's fall as they see their
own countries' exports coming under competitive pressure from dollar zone
countries. Financial pressures in the investment sector which may be forcing
institutions and funds to offload good investments with bad to help preserve
liquidity. And perhaps a general feeling among the less-excitable sector of
the investment fraternity that gold may have risen too far too fast.
There is a nervousness out there too that the huge growth engines of China,
India and the BRIC countries may be forced to slow should the all-consuming
US move further towards recession.
All of these factors are having a short term impact on gold and other
commodities which, in theory at least, should still be among the safest of
investments in the current financial climate.
The fundamentals supporting the gold price are still in place and many, if
not most, serious commentators, rather than the out and out gold bugs who
expect even more, do see good potential for the gold price to rise further
quite sharply over the next year, but the current hiatus may well continue
in the short term as the metal price consolidates at or around current
levels.
Markets are a little nervous at the moment. What has changed in the gold
sector has been the rise in the gold ETF with now over 700 tonnes held in
such funds. This puts a speculative metal-holding overhang into play which
could bring some physical gold back on the market if investors get nervous.
So far signs of this happening have been pretty muted, but it is another
factor which needs to be taken into consideration.
Central Banks are another factor, but there is the impression now that the
impetus to sell off may be much more limited. Indeed there was the informed
speculation by Evgueni Ivanov of Polyus at the RBCCM gold conference in
London a week ago, that Russia has been buying gold to boost the gold
element of its foreign exchange reserves. There are indications too that
some Middle Eastern nations have been buyers as well.
What we seem to have seen in the past week, though, is a substantial slowing
in the overall rate of gold price increase, which had been so sharp since
August, as financial institutions get to grips with the market situation and
Central Banks with the dollar decline. The fundamentals for a climbing gold
price and its position as a store of value are still with us, but perhaps
the overall advance will not be as rapid as earlier general predictions may
have suggested.