Gold is coming to life again — and looks poised to move higher in the weeks and months ahead. Having fallen precipitously from its all-time high at just over $1,923 an ounce in early September to a recent low near $1,540 in early October, a peak-to-trough correction of some 20 percent, gold has been, until recently, trading mostly between $1,640 and $1,680.
Gold has now moved to the top of this range and even slightly higher; I sense it is just now resuming its long march upward, a march that could, before long, carry the price to the $1,850 region and perhaps even to its historic peak of $1,923 by the end of this year.
Ironically, Europe’s continuing sovereign debt crisis — a situation that should promote fear-driven demand for gold — has, in recent weeks, weighed most heavily on gold’s price. In addition, a sharp reversal in speculative positions on futures exchanges and other derivative markets has contributed to a two-month consolidation.
Ordinarily, investors and analysts might expect Europe’s impending economic and political disaster to send gold prices rocketing skyward — but this has not yet been the case. Instead, it triggered “safe haven” demand for the U.S. dollar and boosted the greenback’s exchange rate against the euro to gold’s detriment.
I have no doubt that the recent downward pressure on the gold price arising from the U.S. dollar’s “apparent” strength will prove to be temporary. Indeed, in late October, with demand suddenly surging for investment-size bars and gold exchange-traded funds, it looks like safe-haven gold demand may finally be picking up even as the flow of funds into the dollar continues.
In any event, gold’s fortunes are set to improve in the weeks ahead: If Europe’s debt crisis subsides, the dollar will no longer benefit from its safe-haven role. If it continues to worsen, investors particularly in Europe are likely to accelerate their rush into physical gold, buying bullion coins, small bars and ETFs, as they did in mid-2010. But, either way, as traditional physical demand continues to grow, especially in Asia and from central banks in that region and elsewhere, gold is increasingly going into stronger hands that are less likely to sell even at much higher prices.
While speculative pressures have pushed gold prices lower, physical demand has remained quite firm — not just from Europeans seeking a safe haven — but, even more so, from Asian markets where investors and consumers are taking more gold for reasons that have little to do with the world political and economic situation.
India, for example, on Oct. 26 began celebrating the Diwali “festival of lights,” considered an auspicious time to buy gold. Indians are showing no reluctance to acquire gold at what are historically very high rupee-denominated prices.
Chinese gold demand is also robust, due to income growth, rising wealth and also inflation fears. Higher gold prices, rather than discouraging demand, have attracted new investors to the market. The central government has been pro-active in promoting investor access to gold by encouraging the development of physical and futures exchanges and retail gold distribution through banks and other retail outlets nationwide.
Jeffrey Nichols is a recognized expert on the economics of precious metals markets. He is managing director of American Precious Metals Advisors (www.NicholsOnGold.com) and also serves as senior economic advisor to Rosland Capital LLC (www.RoslandCapital.com), a retail dealer of precious metals investments and numismatic coins. Follow Jeff Nichols on Twitter @ NicholsOnGold.