A Timeout for Gold

Friday, 19 October 2012
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Published in From The CEO

In our last column, we mentioned that the market has already factored in the news about QE3.  Gold bugs need not feel discouraged though.  Quantitative easing is still the single biggest factor driving the market.  Just now though, the gold market is weighing the effects of other news -- counting all the other chips on the table, so to speak.

During this recount, the yellow metal needs additional news to push past the wait.  But as long as our Fed and other central banks choose to print paper money, it’s not a matter of if for gold.  It’s a matter of when.  Although gold needs an additional engine right now, quantitative easing continues to work its disastrous magic.  In the meantime, let’s look at the impact on gold of some of the market forces currently motivating a delay in gold.

First-Strike

The U. S. housing market is beginning to reveal a bit of a pickup, with existing home sales reaching 4.73 million.  According to an article in this morning’s Wall Street Journal, residential construction is at its four-year high point and could positively influence the U.S. job market and economy at large.  Also, builders surpassed economists’ predictions with a seasonally adjusted annual rate of new starts of 872,000 units last month, up 15% from August and 34.8% from September of last year.  Since this level of housing starts “was the highest since July 2008,” the gold market was bound to react in some way.

Also, the euro has weakened about one quarter cent to the tune of 1.3033 against the dollar, according to The Bullion Desk.  The effect on gold is not surprising since, as we’ve previously pointed out, gold will often take its signal from the euro as it moves contrary to the dollar.  Also, speculative investors long on gold may have been pushed out of the market as their stops clicked in.  A “stop” is simply a sell order at a specific price specified by an investor to his broker.  For technical reasons, gold blogger Toby Connor views the current move down in gold as an expected correction, and anticipates this downward activity as turning around next week.

While much of these economic developments seem to be inhibiting gold on the way up, other less publicized developments seem to be supporting gold within a range.  We have previously mentioned disappointing news for bold emanating from India because of the weak monsoon season.  Suddenly, there’s news of a pickup in demand from India (traditionally, the world’s largest buyer of gold).  According to the Economic Times, India has experienced a surge in gold buying in response to a drop in local prices.  Month-to-date in October, Indian demand has increased by 10%.

The Indian increase in buying is tied to the very popular Diwali holiday season. The holiday symbolizes the triumph of good over evil. Celebrated traditionally between mid-October and mid-December, and otherwise known as “the festival of lights,” Diwali represents an enhanced gold-buying season for India.  Bullion demand will likely accelerate for the holiday.   The president of the Bombay Bullion Association reports that India is likely to import 250 metric tons of gold in the fourth quarter in connection for the festive season and to satisfy wedding demand.

Under the circumstances, the current price levels for gold (between $1,717 per ounce and $1,737 per ounce today) represent excellent value for buyers looking for a timeout in the gold market. 


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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.

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