I have said it before - it always feels like analysts are looking to call a top in the gold market each time it reaches new heights. This latest stab at fresh highs is no exception. With so many fundamental and technical analysts looking for the potential for exit signs, I am here to remind you that there is plenty of support that I think makes calling a top a bit premature right now.
Gold has been on the move since the housing market collapsed and the domestic economy went to pot. Throw in a little global slowdown, and there was a recipe for the first few price spikes above $800 an ounce. What stopped it in 2009 was a heavy combination of stimulus from banks and governments which helped bring hope and enthusiasm for potential recovery. Fast forward a couple of years and now the global investment sphere has the same troubles AND a giant hole of debt contagion that they are trying to fill with hot air. Where is the recovery?
A patchwork of problems that are just starting to come to light have helped gold march higher since that strong sell off. Investors fear that there are still too many questions and not enough answers, so why would people be trying to forecast a top in gold? The interesting thing is how widely varied the top dollar values really are.
At the end of 2010, George Soros was among those calling a top in gold, or at least a dubbing it a “bubble”. A member of Deutsche Bank echoed what Soros said about the price movement being rational at the beginning. He argued that it made sense with gold being a hedge against inflation stemming from quantitative easing. He suggested that gold could get to $1,450 in 2011 and up to $1,600 in 2012, but above $1,800 might be bubble territory. The caveat to this forecast was the examination of the fundamentals – would the world still be grappling with debt issues? Well, gold exceeded his forecast and the debt problems are still lingering on. (1)
Goldcorp’s CEO thought $1,700 was a reasonable price forecast for 2011. Other websites tout a move towards $4,000 and beyond. Will it be the collapse of fiat money or a sudden spike on hyperinflation? The trouble with all price forecasts that are looking for the upper limit in gold is that they are relying on data in gold’s past. Right now, the issues facing the global marketplace are unprecedented.
The Great Depression is about the only thing that people try to use to parallel the current events. There might be similarities in unemployment issues, but the world is a different place, and the kinds of goods and services and the sheer number of people across the world make it a new can of worms. Many developed nations rely heavily on services rather than goods for the bulk of their GDP. When confidence and a certain amount of disposable income disappeared with the housing market collapse, so did a good many of those jobs. I look at it this way: everyone was feeding off the fatted calf that was the housing market. There were construction companies, new residential builders, mortgage brokers, and all kinds of satellite jobs linked to housing that when things went south - a vacuum remained. There is nothing to really take the place of those jobs that were lost. I think the failure of the stimulus to create jobs is a testament to that. All the money that was created in two rounds of quantitative easing was sucked into that vacuum and all we are left with is a tattered US dollar. That is what continues to drive people into the gold market, and that is why there is little that officials can do about the debt problems on either side of the Atlantic. We can shuffle things around for only so long before someone notices that we are just moving chips around - not really gaining new ones.
Summary
Is gold ready for another sell-off? Maybe some light profit taking, but Europe’s latest round of woes will likely drive in more bargain hunters. Is there a ceiling at $1,800? I don’t see one. Whether you subscribe to the forecasts that suggest a potential bubble or you believe that inflation will continue to drive gold into the thousands of dollars per ounce level, the one things I see right now is a whole lot of problems and no solutions. That is just about the best fundamental and psychological support that this market can hope for with each price move higher.
Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.
