Gold price moving closer to significant level

2011-NOV-07

After reaching its correction-low of $1,532 per troy ounce, the gold price has recovered in recent weeks, reaching close to $1,770 per troy ounce in early trading today. Gold prices remain well supported by “easy” central bank policies. Last week saw the European Central Bank lowering its key interest rate by 0.25%, while officials at the US Federal Reserve are dropping hints about new bond purchases by the Fed.

This speculation has increased as a result of the sluggish growth in the US economy in recent months, combined with the Fed’s continuing insistence that deflation remains more of a threat than inflation. The Fed is currently maintaining the size of its balance sheet via “Operation Twist” – a programme that involves selling short-term Treasuries and using the proceeds to buy longer-dates Treasuries. But many fear that this programme is not be enough. Ben Bernanke has stated repeatedly that he will use all means at his disposal to fight deflation – moves that will inevitably involve money printing.

Should the Fed decide to start a third round of quantitative easing (QE), this will be of great benefit to gold, silver and other commodities. The US dollar would then fall back under strong sales pressure in relation to other important currencies. But market participants and analysts disagree on whether the gold price has finished its correction phase or whether there will be further price setbacks. While there are many market participants who believe that the time is right to reenter the precious metal markets, other analysts in turn are warning that after reaching the technically significant level of $1,800 per troy ounce the gold price will drop again. One of the warning voices is John Taylor's, CEO of FX Concepts, the world's largest hedge fund. Back in October Taylor predicted a short gold rally that by the end of November would propel the gold price up to $1,800 per troy ounce. The gold price has now moved close to this mark. The direction it will take from here remains to be seen.

In one of his weekly market reviews in October, Taylor predicted that towards the end of this year he expected to see a new economic crash. Gold, silver and other precious metals would not remain immune from this trend – and thinks that the gold price could test support between $1,000 and $1,200 per troy ounce, before investors start reentering the yellow metal market.

Distortions in the financial markets are, however, of such a magnitude that buying precious metals remains a good long-term decision. Central banks remain committed to trying to achieve a controlled devaluation of the currencies they issue.