Will the Gold Price Rise Short-Term?

The market mood for gold

Today we are seeing the gold price rise as it complets this particular step of its short–term consolidation after hitting record highs last week. But inside the price what is there from which we can answer our question?

Gold has been consolidating over the last week after reaching a new record high level in this quiet season for traditional gold buyers.
It is clear that there are very large buyers in the market who are seeking to buy large amounts of gold, without chasing prices. These have identified themselves to some extent as central banks. Not all of them are visible, nor are the sovereign wealth funds who are buying as well.
Their buying practice is to set price limits that they will pay and then wait for the offers of gold. Hence they too are not clearly visible when prices don’t move.
Large long–term holders of gold are buying through Exchange Traded Funds and have bought 124 tonnes so far in the last month. They tend to buy gold as the gold price starts to rise.
Traders have changed their practice from one of pushing prices and leading the market as they did five years ago to following the direction of the market and profit when others move the price. They find current conditions more difficult as a result.

The net result has been that prices don’t fall as far as the charts indicate, but are rising higher than expected.

What impact will the G–8 and G–20 have on gold?

The meeting this weekend of the G–8 and G–20, we expect, will have no more effect than past ones have had. Encouraging statements will be made about good intentions, but with no believable plan of action. As now is the time for them to act, the climate of uncertainty and fear will continue to persist. Unfortunately, Politicians have other matters on their agenda and don’t perform well, until a crisis is upon us. So we will have to wait for that crisis. Crises then tend to appear out of nowhere, hitting markets hardest and producing differing levels of panic.

To emphasize the point, markets have looked to governments to calm them when financial uncertainty persists. Government actions to date, taken inside the financial markets have not turned the global economy back to strong growth in the last three years. Banks have succeeded in softening most of the new regulations that will apply to them emasculating their effectiveness. Political considerations often precede effective reformation and regulation as a result. This discourages markets.

So, all in all, the G–8 and G–20 will likely add to the fears that markets presently face and encourage more gold price rises.

Supply of gold

There is almost no flexibility in gold supplies. Gold mining is extremely inflexible so tends to remain unchangeable in the short–term. Only by inciting sellers to come to the market can new supplies arrive. That takes a price sufficiently high to convince sellers that now is the time to sell. When this selling comes it is called ‘scrap’ sales.

But that is only as flexible as the price rises. Too low, no scrap sales come to the market. Too high, scrap sales can swamp a market. But there are no hard and fast rules to that formula. If the general expectation is for a $1,500 price, then hoarders will keep a tight grip on their gold until that price is reached even when they want profits.

But in this day and age gold owners are holding gold as a counter to the uncertainties in other markets and this is priceless!

Put another way, if you want the gold price to come down, regain the confidence of the consumer and rectify the national economy. If you don’t, people will continue to hoard gold.

Demand for gold

Demand for gold is growing through a broadening of investment demand. In different countries and through new different investors the market is deepening. This investment demand is coming from people in different walks of life. As confidence decays, new investors appear. This type of demand is now controlling the bulk of the market. Where jewelry demand had waned last year, we now see it return to activity, but with its gold content firmly in the buyer’s mind. In fact, as gold is not consumed but usually recovered, gold in all uses should be categorized as investment gold.

We continue to believe that new gold investors will keep coming and coming over time from central banks right down to Joe Citizen. Their driving reason will be that they want to have gold for rainy days when it can be used to provide value where currencies don’t. That force is global and growing!