What's Next for Gold? - Hindu Business Line Op-ed

By Adhvith Dhuddu
(Op-ed as appeared in the Business Line Hindu on Oct 21st)

Gold recently broke through the $1,000/ounce psychological barrier, generating interest among investors, traders and even the common man. Currently there are many factors abetting the price rise in gold. Although no concrete prediction can be made about the price, the outlook appears bullish. There are nine crucial factors that affect the price in the short and long term.

LONG-TERM DRIVERS

Forex reserve allocations: The Asian Financial Crisis in 1997-98 resulted in an accumulation of forex reserves over the last decade. After amassing forex reserves in US treasuries, many Asian economies and export-oriented countries have exhausted their appetite for US debt.

The slow divestment from US treasuries to gold and other precious metals will impact the price of gold. An increasing proportion of forex reserves is being held in gold as countries realise that this could also be a sensible hedge against a slumping US dollar.

TV9 COMMENTARY ON GOLD

Main points made:

1. The price of gold should continue to rise as there are many factors that are abetting the rise.

2. As inflation fears plague the US economy, and as the true reality of the economic recovery is known, a safe haven like gold should see higher demand.

3. Unprecedented debt issued by the US government will result in inflation now or later, and this will devalue the US dollar significantly. As gold is a dollar-denominated asset, even if supply demand numbers are stable, a weakening of the dollar will mean a rise in the price of gold.

4. The recent economic crisis have forced many export oriented countries, and countires with bulging forex reserves to divest the US-dollar holdings (at least partially) and funnel them into gold both as a hedge and as a safe haven.

5. The supply of gold will only rise constantly and steadily. But the demand for gold can suddenly shoot up in times of crisis as a safe haven.

6. General commodity cycles last about 20-25 years; this one began in early 2000 and could last another decade or more. Of course 10-12 more years of bullish sentiment in commodities will be associated with some bearish periods.

7. Temporary seasonal factors (like the festival season in India for the next 2-3 months) also mean the bullish sentiment in gold is validated.

Where is GOLD headed, and WHAT DETERMINES its direction?

Gold has been inching up quietly in the last few weeks, and not many are taking notice because there haven't been any monster moves. But the way it's shaping up on the charts, we could see some huge movements coming in the next few weeks. Coincidently, gold has been in an uptrend ever since November of 2008 (click on the chart below for a bigger picture in a new window), when the financial crisis was unfolding at a rapid pace. It' has formed higher bottoms, has never reached the November 2008 lows and is approaching the previous tops made in Aug-08 and March-09, which are all pretty bullish signs. Here are some things to watch out for when trying to forecast gold's future movements. 

1. The continued weakness of the US dollar is contributing heavily to the rise in gold. If the dollar continues to depreciate against major currencies, the uptrend in gold might continue. 

2. Gold is comfortably above two critical moving averages (the 50 day and 200 day moving averages) which is a very bullish sign on for commodity traders. 

3. The technical formation on gold is very bullish as volume has also been picking up slightly in the last 2 weeks. 

4. Gold has massive resistance between $1000-$1020 which is a very critical band. If gold consolidates there and lacks strength as it reaches that price, it can correct back to the $900 levels. The other scenario which is more likely is that gold will shoot through this resistance with good volume and reach $1100-$1120 very soon. 

5. Fundamentally speaking, if the, "green shoots," sprouting in different economies turn out to be weeds, i.e. a false signs of recovery, then gold is the safe haven that everyone will rush to, which should send the price of the yellow metal up another 15-20 percent. 

6. Many countries are slowly and silently divesting tiny portions of their US treasury holdings in their foreign exchange reserves and funneling them towards gold. In fact, if the dollar crashes gold prices will SURGE so this acts as a small hedge in many cases. 

7. If the commodity bull market resumes and initiates its second leg, then gold might see historical levels very soon. 

NOTE THAT THE CHART BELOW IS FOR THE GOLD ETF GLD. THIS ETF APPROXIMATELY REFLECTS 1/10TH THE PRICE OF AN ACTUAL OUNCE OF GOLD. CLICK ON THE CHART BELOW FOR A CLEAR PICTURE. 

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