Gold - positives outweighing negatives for bullion and stocks

Gold is showing continuing signs of strength amidst volatile general stock and commodities markets and gold stocks have done particularly well over the past two months, but there are some negative signs around in the important Middle Eastern and Indian jewellery/investment sectors.

LONDON - 

The past week has seen a positive gold price performance up to close to $880 at one stage, before falling back to around $850.  The strength coincided with a sharp fall in the dollar after the latest Fed interest rate cuts, while the fall back occurred in line with the dollar regaining some strength and there is little doubt that day to day movements were generally dollar related during the week. But it should be noted that a non-dollar related spurt at the end of last week put the yellow metal into this latest trading range.

Gold also seems to have broken away well from its earlier relationship to the oil price which has been in the doldrums and still seems to be falling even despite the OPEC decision to cut supplies sharply from January.  The latest price for light crude is around $36 a barrel at the time of writing - a huge fall from the $147 reached only last July.

The gold price has, however, been up and down in the $740 - $880 range over the past couple of months but there are indications that the current re-rating may be a little stronger, in particular as the demand for physical gold has remained particularly strong in the West to the extent that deliveries of smaller units (coins and small bars) are taking the best part of a month to be made as the traders struggle for supplies.

But - and this is an important but - the gold price in rupees has gone back through the 13,000 mark and it is apparent, perhaps due to recent volatility, that Indian purchasers have been leaving the market alone at this kind of price.  Not selling - but not purchasing either.  And this can be important for overall global demand with India still the world's largest consumer of the metal.

The Dubai gold market too is said to be suffering heavily as the tourists, on whom it relies heavily for a strong proportion of its sales, are affected by the credit crunch and financial stringency and are not buying, while locals are finding prices too high, particularly in the light of low oil prices.

The above comments largely relate to gold bullion, but those who invested in gold stocks a couple of months ago in the belief that they had been oversold will have been celebrating with some huge increases in price from recent low points.  If their timing was right gold stock investors will have been making terrific returns while the rest of the market remains in turmoil amid continuing global economic uncertainty with no-one sure where things will turn next.

Gold does normally thrive on economic uncertainty, although in the recent downturn gold stocks fell along with just about everything else in the sudden and rapid need for liquidity to cover shortfalls elsewhere - a reason why liquid stocks performed far worse than illiquid ones!

But given a little pause for breath gold's values have been becoming more apparent to the general investment community and while it is true the lack of availability of credit, coupled with the collapse in stock prices, has put a number of the more cash-strapped gold juniors in jeopardy, those with cash sufficient to see them through at least a couple of years should remain in business, and if they have a genuinely good deposit/project in sight should continue to do well in the current climate.

More speculative companies and prospects may be left out on a limb though with the possibility of running out of money to meet normal ongoing expenses, let alone sufficient to continue exploration programmes or mine development.  These may find it impossible to raise money from banks or from stock markets.  Their only real hope is a takeover and owners may balk at the monies being offered for what may have been a high flying stock only a few months ago.  Predators are not known for their generosity at times like this.

Overall though there seems to be a burgeoning feeling that gold may have a ways to run yet if and when the market really begins to take off and can break through what appears to be strong resistance at around the $870 level.  There are still plenty out there predicting $3,000 gold or higher, but then most of these have been saying this for years.  But there seems to be no real reason why the yellow metal shouldn't test the $1,000 level again before too long - apart from the lingering doubts about the important demand in traditional gold jewellery buying areas like India and the Middle East.  The dollar is not in reality as strong as the market would seem to suggest given the USA's huge deficit and at some stage this should lead to a gold revaluation - but as usual the question is when? 

Stock markets in general and industrial metals prices may still be in for a rough ride over the next months - or even years - given there seems to be no let up in the housing markets, while the automobile sector may be in meltdown too.  So gold may yet be the most reliable way of weathering e continuing storms ahead.

In this context one would consider the downside relatively limited though while the wealth maintenance and upside potential continue to be favourable.

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Comments and Posts I wish MineWeb had a "posting community" like MarketWatch.com has. I would imagine if you could develop that, it would bring a lot of gold bugs and anti-gold types here. This being a "gold friendly" website makes it attractive not only to us gold . .more bugs but to people trying to learn about gold. . .less by Southern Gold on December 19 2008, 04:43 Find this comment inappropriate? Report it

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