Now coy Bernanke boosts gold after last month's knockdown

The latest statement from Fed Chairman Bernanke has given some stimulus to the gold market, much as his comments in last month did the opposite and the price has seen a surge back towards the $1700 level.

Author: Lawrence Williams
Posted:  Tuesday , 27 Mar 2012

LONDON (Mineweb) - 

A statement by U.S. Fed chairman Ben Bernanke last month, which seemed to suggest that the Fed's Quantitative Easing program may be coming to an end, was widely seen as responsible for a big fall in the gold price - and now another statement which seems to suggest the opposite may be the case has seen the gold price clamber back up again.  But in truth Bernanke's statements are open to different, and sometimes opposing, interpretations by different scholars!  People tend to believe what they want to believe and this time it's the gold bulls and the traders who make a profit on the turn, who are talking the gold price up again - so far successfully.

Technical analysts are having fun too.  Gold's recent low point of $1729.80 was in line with a classic Fibonacci level contraction and the fact that it steadied from here and started to rise is seen as very positive for gold, at least in the short term.  Now the chart followers have their eyes on the 200, 100 and 50 day moving averages where it is felt resistance may be seen on the upside, in the same way as it was seen on the downside.  If these averages are indeed breached, taking gold up into the $1710s plus, then an upside surge is seen as likely.  So far the 200-day moving average has indeed been breached on the upside this morning in late Asian and early European trade and thus the price is moving towards the 100-day figure and $1700 which are seen as the next major targets.

But, as always with gold there are as many preaching downside as there are looking for the upside - it is indeed almost a religion with its evangelical wing calling for $2,000 and then the sky, while the gold agnostics are still predicting a bursting bubble as they have for the past ten years.  One day they will probably be right, but they may well have lost an awful lot of money in the meantime. 

Gold does defy logic as Warren Buffett, among others, is quick to point out.  But the significance of gold as wealth is inbuilt into the human psyche, almost from birth, through folklore, fairy tales etc.  Variations on the word gold even mean money in a number of languages.  Some countries revere it more than others, but throughout history gold jewellery and ornaments have always been considered not only decoration, but also as a means of preserving and trading wealth - and this is apparent across nearly all cultures.  Indeed the search for gold has at the least contributed strongly to the opening up of many countries, not least among them Canada, Australia and the U.S.A., as it is doing today in parts of Africa, remote areas of Asia/Australasia and South America.

Ironically, the SPDR gold ETF, which held up well in terms of inflows and outflows in the initial stages of gold's recent dive, had started to see major outflows ahead of the recovery which commenced at the end of last week - the same applies to top silver ETFs which also saw big outflows towards the end of last week.  There has been talk of gold becoming a contrarian play, but such short term indicators can be very misleading.

So where do we go from here?  The more rational commentators on gold have been predicting a bumpy ride for some time, but tend to nearly all still look for an overall  price appreciation this year, although most have tempered their forecasts of the increase to lower levels than they were looking for only 3 months ago.  To hazard a guess at where gold will be by the year-end is a dangerous game, but global economic difficulties are far from over, particularly in Europe, and such uncertainty does tend to have an overall positive impact on precious metals prices. 

The major economies still have very loose monetary policies thus continually increasing the money supply by one means or another, which in turn devalues their currencies and as long as gold is seen as some kind of protection against currency devaluation - and this is not something which is likely to change quickly as it is seen as having had this quality for hundreds, if not thousands, of years -then it will likely continue to appreciate overall in local currency terms at least.  The mega gains some predict imply total currency collapse and corresponding hyperinflation, but there is perhaps an increasing feeling that most governments at least can stave this off.  On the other hand there won't be a bursting of the bubble (if you can call it a bubble) until economies stabilise and start to recover and this still looks to be some years away yet.