What now for gold as it holds up well in the weak price season?

Many had predicted a sharp decline in the gold price during the traditionally weak northern summer period, but this hasn't happened so what is seen to lie ahead for the yellow metal.

Author: Lawrence Williams
Posted:  Monday , 20 Jul 2009

LONDON - 

Even many gold bulls had been predicting the usual northern hemisphere summer doldrums having a negative effect on the gold price, with falls down to $850 or below seen as likely.  But, the yellow metal has been holding up remarkably well, with any downwards movements seeming to falter in the lower $900s and an effective trading range of between $920 and $950 an ounce seeming to have been established. And today gold moved back up through the $950 level for the first time in nearly a month with signs that some of those who had been nervous about the higher prices are now beginning to believe that these stronger levels are here to stay.

To be frank, the immediate gold price stimulus has come from a sharply weaker dollar and a corresponding rise in the price of oil - although to tie the gold price increase to the oil price rise, as some commentators seem to do, is perhaps a little misleading as currently both commodity prices primarily reflect the dollar fall.

But there seem to be other factors out there which are supportive of the gold price at the present time. Those who look at gold's fundamentals as being the key indicators seem to have been puzzled by the metal's resilience this year when supplies have been boosted by a substantial amount of scrap gold coming onto the market, at the same time as demand by the Indian jewellery manufacturing market - traditionally the largest global gold offtake sector of all - had seen a huge decline in demand as the jewellery fabricators had been unwilling to pay the high prices set by the market. This had only exacerbated the big fall in the western luxury markets - the other major consumer of gold.

This has obviously happened before, but invariably the jewellery sector, if it believes the higher price levels are here to stay, will eventually return to being a significant purchaser. And reports coming out of India suggest that this is indeed beginning to happen despite a rupee price spike. Add to that ever-growing Chinese demand as higher earnings filter down to the growing middle class there and it seems the Eastern appetite for gold could be resurgent.

To a great extent the decline in jewellery offtake in the second half of 2008 and first half 2009 had been heavily offset by the big pickup in investment demand, with the world's biggest gold ETF - the SPDR Gold Trust - growing at a phenomenal rate during the first few months of the year. While this growth seems to have stalled for the moment, it hasn't seen much of a pullback either despite the lure for investor money of global stock markets which seems to have been performing better and better. But there is still much nervousness out there that the current market recovery is but a false one and there remains a big offtake in bullion, as well as growth in some ETFs, as a result.

Indeed some of the SPDR Gold Trust's slight fall in holdings may have been due to a switch from paper gold (ETFs) to coins and gold bars due to a certain amount of scaremongering out there as to whether the ETF paper is fully backed by physical gold.

What this means though, is that should gold demand and price continue to hold up through the weak northern summer months, the metal price could be set for a strong surge in the fall which could perhaps take it through the $1,000 level once and for all, although the price seems to have stalled every time it gets close to this psychological level so far. If the dollar remains weak, as many feel it will, then surely the $1,000 breach is inevitable with or without the forecast accompanying inflation (or even hyperinflation although one should hope and pray that this does not occur as the political and social consequences of widespread hyperinflation would likely be too horrific to contemplate. Even if gold protects your wealth in such a scenario you may not have much to spend your wealth on.)