Gold shows great resilience in the face of adversity

The gold price has recovered very quickly in each case from two successive announcements which were seen by some as marking the end of the gold bull market.

LONDON - 

A couple of days ago, Mineweb published an article for which the headline noted that the adverse impact on the gold price of the IMF announcement that it would broaden the sale base for the remaining 191.3 tonnes of gold on offer would be a one or two day wonder.  And so it proved - probably less than a day in fact for the initial recovery to kick in, but then the price was knocked again by the U.S Fed raising its discount rate and thus effectively providing the first sign of monetary tightening in the U.S.  Gold plunged again for less than 24 hours before it recovered virtually to pre-IMF sale announcement levels once more.  And what's more the yellow metal achieved all this in the face of dollar strength - usually a precursor of gold price weakness.

Numerous commentators had viewed the sharp fall in the gold price in the face of the IMF sale announcement as an indicator that no more Central Banks were interested in using this to supplement their gold reserves and that this was bearish for the gold price which could well fall back to the $1,000 level or even lower.  Although this could be possible obviously the IMF sale announcement was not the trigger which would lead to this.

Likewise the tightening of the U.S. Fed's discount rate by 0.75%, although again a knee-jerk reaction on the markets saw gold marked down, did not prove to be the trigger either.  Obviously as gold approaches the $1,100 level on the downside, buying comes in and the price rallies.  This suggests there is still plenty of big money buying gold on any sign of weakness - in part because the global financial situation looks as though it may get worse before it starts to get better.  The Euro zone is in a big mess - and that's the only reason the dollar is perceived to be rising - and with fairly lukewarm indications of support for the bankrupt Greek economy which will likely lead to deferral or default of that country's debts, possibly followed by others - notably Portugal, Ireland , Italy and Spain, not to mention some of the Eastern European new member stated, and even the U.K., the pan European economy is in trouble, almost across the board.  With  sales trending downwards again, the recovery from official recession status may well be shortlived as growth looks as though it may be turning negative again.

Even though some U.S. indicators point to marginally better times ahead on that side of the Atlantic, others are still pointing in the opposite direction so it is certainly too soon to say that the recession is over even in the main driver of the global economy.  One fears the downturn could have a good way to run yet.

With both the U.S. and the Europeans continuing to try and terminate the recession through printing money, and with the U.S. dollar, the Euro and the pound sterling being the principal reserve currencies around the world, it's not surprising that those economies sitting on surpluses like China might want to diversify away from their reliance on these and the comparative stability of gold may provide an answer.  However China produces more than enough gold of its own than to have to rely on purchasing the yellow metal on the open market or from the IMF.  One suspects that the gold price has not flown because so many out there believed those pundits who reckoned China would buy all the IMF gold and the disappointment which followed when that proved not to be the case.

What has happened to the gold price recently is probably highly significant looking ahead.  It has survived knee-jerk downward reactions to some external announcements - which the conspiracy theorists among us will have put down to intent to depress the gold price - and has remained pretty firm in the face of an appreciating dollar which also defies general theory.  This should lead to a steady increase in the gold price in the months ahead until the summer doldrums set in, and it could be poised for faster appreciation in the fall.  But, never discount external impacts which can force the price down as nervous fickle investors sell on announcements from third parties which, if looked at logically, should have no impact on the price in the first place.  The long term gold believers are in there for the duration - maybe for ever - and there now seem to be enough of these to severely limit any significant downside.

Also don't necessarily believe that gold will do well in an inflationary scenario - the research on that is somewhat contradictory.  But it has proved to do well in a deflationary environment in the past and that is why the smart money is staying with it.  The worries about recession/deflation/depression even are still out there and that is the real threat to wealth.  Gold should remain a protector against major downturns elsewhere.  It may not rise to the mega-thousands of dollars in our lifetimes, but is should still help protect us from general financial meltdown, but like with all insurance policies let's hope and pray such a situation does not materialise.

When savvy investors like George Soros put a whole hunk of money into the top gold ETF - and the smart Chinese Sovereign Wealth Fund, CIC does the same, that gives some great credibility for gold as an asset worth hanging on to in the current environment.  It may not make you a fortune, but it may well stop you losing one!

SUBSCRIBE to Mineweb.com's free daily newsletter now.

SHARE THIS ARTICLE

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

Print story      Email story      Subscribe to free newsletter

Back

 

responses to this article

Gold Hmmmmm...... Never heard MineWeb so bullish on gold ...a contra-indicator? by Will Hanson on February 20 2010, 12:30 Find this comment inappropriate? Report it

More bullish than ever Demand for US treasuries have been falling, next week will confirm that same trend. China is selling UST and Japan cannot fill the gap, no matter how much more Toyota is being held hostage..... what is going on is shameful, dusgusting, and . .more pathetic. People begin to understand the games the US Fed is playing. The bond market is short before a collapse. Gold will go up VERY fast this time ! Go GATA ! . .less by Martin Meier on February 20 2010, 16:27 Find this comment inappropriate? Report it

In gold for the long haul Gold is part of my diversified portfolio i.e. everyone should hold some gold in an ETF. I have a fair whack of gold and it bailed me out in the October 2008 market crash. I started investing in GLD in September 2007 with a lump sum and it has shot . .more up since then. . .less by Tom Petty on February 22 2010, 03:03 Find this comment inappropriate? Report it

doomsday I have now got 40% GLD and 40% BTI. There is nothing else on the JSE that might survive whats coming. Everything is going to fall - property, stocks, bonds, the works. Nowhere to hide this time around. Enjoy the SWC and then hang tight because all . .more hell is going to break loose in the world economy after that. . .less by kaliel on February 22 2010, 16:45 Find this comment inappropriate? Report it

Name
Subject
Comment