Is gold poised for breakout?

With gold hovering around record price levels again, does the recent surge suggest a breakout to much higher levels is imminent.

Author: Lawrence Williams
Posted: Wednesday , 02 Mar 2011


After a month or so in the doldrums after hitting a record high in December, the Middle East/North Africa (MENA) unrest has launched the gold price towards yet new highs, and at the time of writing the yellow metal was trading just above $1,430 an ounce in Europe.

In OTC trading in the U.S. yesterday a new all-time high had been breached temporarily.

Some observers, notably Julian Phillips of Gold Forecaster who is a regular writer on Mineweb, sees the latest move in the gold price as being a long-awaited breakout and now expects to see a move to new highs between $1,500 and $2,000 this year with higher prices thereafter.

Other pro-gold commentators will be even more bullish, but there will also be plenty of naysayers out there They just cannot recognise that the movement in the gold price defies what is nowadays deemed as normal investment logic because gold is hard-wired into the psyche of a large part of the world's population as the perennial wealth store and a hedge against bad times. When this coincides with external events like the MENA ‘uprisings' the pressure pushing the gold price up can be extremely strong.

Gold demand is currently being skewed by burgeoning offtake in the East - notably in China and India and other South and Far Eastern nations - where a sea change has been taking place in the wealth and investment potential of the population. This has been brought on by enormous advances in GDP and a corresponding growth in the numbers of people entering the potential gold-buying market, and in their disposable incomes.

Probably nowhere is this being seen to more effect than China. Anecdotal reports indicated a tremendous surge in gold buying ahead of the Chinese New Year in early February - and by all accounts this is continuing after the New Year as the population is becoming increasingly nervous about inflation, which Chinese economists, seriously worried about the ‘export' effects on prices of the U.S. Quantitative Easing programs, view as Bernanke-inspired. There are reports of long lines developing again at shopping outlets selling gold and gold jewellery with demand running hugely ahead of the same time last year - a year in which Chinese demand reached record levels.

While China seems thus to be underpinning the gold price with ever growing frantic demand there is evidence, though, that other Asian markets are a little more cautious on the higher prices - perhaps in part because for the most part they are more established gold markets while China is much more of a new player. Even so, Asian gold buyers do have a penchant for hanging on to their gold and only selling in real necessity - it is not primarily a profit-taking trading market as seen in much of the West.

So at the moment we have perhaps a higher proportion of Western investors trading in and out of gold, hence its volatility and the limitations which tend to mitigate highs as profit taking comes in - although it does seem that the really big investors, like Soros and Paulson, are largely hanging on to their precious metals and not liquidating even a part of their holdings on the current high prices. Thus we have seen holdings in the SPDR Gold Trust ETF continuing to fall, although there is evidence in the past few days that the rate of decline has been easing and maybe we'll see a reversal in the next week or so dependent on global events.

The advances and retreats in precious metals prices in recent months have largely been on the perceptions of how well the U.S. and European economies are recovering from recession. As things are seen to improve the safe-haven appeal falls away and prices dip, and also better investment opportunities are seen elsewhere, although recent stock market weaknesses may mean this is a false perception.

But when adverse economic figures appear the reverse happens and interest returns to precious metals. Now, the current MENA troubles are putting serious pressure on the oil price and high oil prices are seen as potentially depressing the Western economies, hence the gold price surge. Should things quieten down in the MENA countries then gold and silver could retreat again. If the unrest spreads - notably to Saudi Arabia - then all bets are off and the sky could be the limit.

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