Gold Bullion (GOLD)

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Is another good summer for gold now ahead?

Has there been a complete mood turnaround in the gold market? Up until Friday it had mostly been doom and gloom for gold investor. But now what after a 5% plus price increase in a day?
Author: Lawrence Williams
Posted: Saturday , 02 Jun 2012

LONDON -


What a difference a day makes! After a month of doom and gloom and lingering doubts that, perhaps, the gold bears are right after all, gold investors will have gone into the weekend with smiles on their faces. Maybe the recent gold price decline is now over and the yellow metal will get back on the bull market track it has been following for the past eleven years. OK it still hasn't got back to where it was at the beginning of May - yet, but it could well have the momentum to do so now that the link with the strong dollar and weak euro has been broken, perhaps decisively.

The portents look good for the gold bulls- but then they have been all along if one follows the logic which provides what should have been the key drivers for an increasing price scenario. But at least Friday's 5% in a day price rise will regenerate some confidence amongst the gold believers, and perhaps put the frighteners on the short sellers who will have had their fingers nastily burnt as they raced to get out of their positions - in itself contributing in part to the very sharp price increase.

As New York-based gold pundit, Jeff Nichols of American Precious Metals Advisors and Rosland Capital, put it in an email to Mineweb late yesterday (Friday): "Has gold lost its mojo? Obviously not! Sooner or later, gold and silver were sure to bounce back. Today, it was the disappointing employment news for the U.S. economy that was the catalyst -- coming on top of other indicators of slowing economic activity. . . not just in the U.S. but also across Europe . . . and China . . . and India.

"All of this taken together suggests another round of global monetary accommodation and reflation -- simply put, printing more money! This is the rocket fuel that gold thrives on.

"With so many so short it should come as no surprise that today's move up has been so dramatic. But beneath it all is a very tight, very strong physical market. Even as institutional speculators and traders (the big banks, hedge funds, and other financial firms) held gold down in recent months, the physical market remained solidly bullish with Chinese private sector demand and emerging nation central banks leading the way."

Can gold fall back again? Yes, of course it can - indeed we'd be surprised not to see a burst of sustained high volume selling of paper gold next week in an attempt to drive the price downwards - just as we've seen in the past, orchestrated perhaps, if the GATAs of this world are to be given credit, by the Fed and its gold cartel allies. But this time one suspects, now that the gold bulls have suddenly gained some confidence back, it may well not last.

Will we see a repeat of last northern summer when gold surged throughout June, July and August, contrary to traditional patterns, before crashing back, after it got ahead of itself, in September. Possibly, but we will have to wait and see. It is still possible that the bears, and those who want the gold price to stay down primarily for political reasons, could gain the upper hand once more but somehow one feels they have had their chance and the most likely directional move is upwards again.

Look at the price drivers. This observer found it hard to understand how the virtual collapse of the Eurozone single currency experiment, bringing together countries with hugely disparate, and divergent, economies under a common currency regime, should have led to gold falling. Logic suggested that the smart European money would have fled the banks into gold as the perennial safe haven. But no - it appears to have chosen the dollar instead, despite the U.S.'s own economic problems which have continually been talked down by the Administration and its Fed allies.

In part it could have been because gold is not yet a Tier 1 asset for banks as we have highlighted in a couple of articles here over the past week or so, and with the European banks needing to strengthen their reserves they may well have had to sell ‘saleable' gold and put their money into the dollar or German bonds, even though they recognise that the former, in particular, has its own underlying problems.

These underlying problems came to the fore though on Friday with what could be described as extremely disappointing job recovery figures in the U.S. - hugely below economic pundits' already slightly pessimistic estimates. This raises the whole question of further Quantitative Easing being needed to try and stop the U.S. economy falling into recession again (if indeed it has really come out of it - who can trust government figures in these days of political spin!). Given that Fed statements had neatly downgraded the possibility of further QE to a level where even much of the financial community, which should have known better, had written off this likelihood in their minds - and investment decisions, the nonfarm payroll news at a time of year when jobs should be booming, was a body blow.

The investment community sees the return of QE, in whatever form, as being decidedly gold positive. Short positions suddenly needed to be liquidated, buying increased and the rest is history - albeit one day's! But so saying gold still has a long climb to get back to its end-Summer 2011 high - but bear in mind that on June 1st last year the yellow metal was sitting in the $1530s before it climbed to around $1910 inside 3 months. It could happen again although some factors currently seen by some as positive - notably the state of the Indian and Chinese economies among others - may actually mitigate against such a rapid increase if demand from those nations - the key gold purchasers nowadays - falls off as a result.

Overall Friday may well have seen a mood change in gold which could well prove to be sustainable for the yellow metal, but could be bad news for stock markets in general.


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