Relentless upwards drive for gold - will something give?

The gold price is continuing its upward drive and talk of a price bubble is seemingly having little impact.

LONDON - 

The gold price seems to be continuing in its almost relentless upward push which has been under way since it broke through the $1,000 barrier at the end of September.  Every time the price stutters big money buying seems to come in to support the new status quo, which suggests there is far more to this than just normal investment demand.  Indeed the previous big drivers in the form of ETFs and ETCs no longer seem responsible for the big price upturns,  although some new increases have again been seen recently, so it is metal purchases which seem to be the root cause - but who is it who is buying?

The general Western investment public is probably not the source of most of the money going into the yellow metal.  Almost all the general pundits out there are saying the gold bubble will burst and this must be having an impact and is probably the cause of the occasional profit taking bouts which knock the price back $10-20 or so, before the new support comes in and pushes gold back to the higher levels in a continuing stairstep pattern.  There seems to be no conviction in the occasional sell-offs, which suggests that gold will continue to climb with $1,200 or higher firmly in the sights for the year end.  Readers may recall that the average year-end price predicted by Mineweb readers back in January was $1,172 an ounce - and at times this year that looked to be an extremely optimistic target, but now it looks to be a conservative one, although a lot can happen in a month!

Prescient Mineweb readers apart, the bull run in gold has been forging ahead for several years now and it does not really show any sign of ending - although the reasons behind the continuing price rise are now almost certainly different from those at the start of the metal's climb.  Now it is very much disillusion with the dollar going forward which is key to the gold price boost, but whether the current support for the metal is coming from big private funds - and there is presumably at least an element of this - burgeoning demand from the gold oriented East as the wealth generated by the Eastern economies filters down to the previous have-nots, or from covert Central Bank buying, is as yet unclear.  One suspects a coincidental convergence of all these factors is behind the price rise, but with one of the main commonalities being the desire to move away from Western currencies as stores of wealth given the huge deficit financing strategies of most Western governments in their attempt to try and ward off another Great Depression.

Potential inflation is often pointed to as one of the major factors, but arguably, while this has to be on the cards at some time in the future, the general devaluation of major currencies is the most relevant.  While this devaluation is actually difficult to quantify given that most Western economies are suffering the same fate, and their currencies are all thus under pressure, although the dollar has proved to be one of the weakest, they are all devaluing against gold - or put another way, gold is revaluing against most Western currencies.  Hence the mutterings from a number of Central Banks and governments for the move to a new reserve currency which would include gold as an integral part of any monetary basket.

India's purchase of almost half the IMF gold on offer under its sales programme has obviously been the stimulus for the latest big jump.  A further stimulus has been given to the market with reports in the Indian press that the country may be bidding on buying the remainder of the IMF gold on offer. 

China is also often suggested as a purchaser of much of the remainder, although this may not appeal to the Chinese where the state can purchase virtually all the gold it requires from its own gold production - and probably on better terms.  The nation is now the world's largest gold producer. 

But where China buys its gold is largely irrelevant if it is indeed buying gold, which seems probable.  If it is buying from its own mines then this is gold which is not otherwise coming on to the market - and the advantage for China of following this route is that the gold can be purchased by other state organisations than the Bank of China and not appear in official reserves unless and until China deems this strategically appropriate to announce.  GATA has always talked of Central Banks manipulating the gold price by keeping it down to preserve currency values.  China is currently in a position, which one can be sure has not gone unnoticed there, where even a relatively small announced increase in gold reserves by global measures could have an inordinate effect on the metal price.  It can play this card if or when it wishes to.

Russia is another country which has talked of raising the amount of gold in its reserves - indeed it is quietly doing so, but as yet does not have the huge financial muscle of China to make such a dramatic impact.  Here again it is likely to be buying from its own domestic production rather than from the IMF.

Overall this does suggest that the big players, India apart,  may not be in the market for IMF gold, but this is not to say that it will not be sold off market in smaller packages to a myriad of other countries in recognition that their dollars are, for the most part, a declining asset. The odd five tonnes here and there would soon account for the remaining IMF gold sale with any balance being easily absorbed by the market.

The other stimulus to the gold market resulting from the Indian purchase is a signal to the Indian gold buying sector that their government thinks gold, at these levels, is a good investment.  Recently gold sales there had been wavering as prospective purchasers were awaiting lower prices.  As soon as they feel that lower prices are unlikely to happen then the country's gold-buying public is likely to be back in the market again.  And, don't necessarily be misled by Indian gold jewellery purchases and sales per se.  Now all the Indian banks, and even the Post Office, like their Chinese equivalents, are offering small gold bars and coins to the small investor looking to preserve his/her wealth.  With the rapid growth of the Indian and Chinese middle classes this is a truly significant factor in the relatively constricted global gold market which just has not been with us beforehand.

So, coming back to the question posed in the title to this article, something could give and the bubble could burst, but probably not for some time yet.  The caution here is that markets are driven largely by sentiment and perception.  If such heavy hitters as the Indian and Chinese governments are seen to be supportive of gold - as well as some of the big U.S. names in the financial world like John Paulson who is launching a new gold fund - then gold price strength is likely to continue and the gold bulls will continue to make hay (a somewhat mixed metaphor).  The bears may yet have their day but, in another mixed metaphor, they may well get their fingers burnt to the bone before this happens.

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GOLD SHARES WHY ARE SOUTH AFRICAN GOLD SHARES LAGGING THE REST OF THE PRODUCING WORLDS GOLD SHARES IN PRICE RISES? THE PRICE INCREASES IN A LARGE PERCENTAGE OF OVERSEAS GOLD SHARES HAS BEEN PHENOMENAL by JOE PUBLIC on November 25 2009, 08:59 Find this comment inappropriate? Report it

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