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18 November 2011

Gold Fails to Respond to Ever More Bullish Drivers. For Now.

The opposing forces pulling at Gold are likely to be a temporary phenomenon while we wait for the real game to arrive in town writes Jon Hunt.

There is a meltdown in the Eurozone, resurgent central bank Gold buying, mountainous US indebtedness, and insatiable demand for Gold from China. Not to mention increasing global gold investment demand, and a rush by investors small and large headlong into capital protection mode. All of these drivers are bullish for Gold, and yet bullion has yet to deliver the kind of explosive gains that many a Gold investor might have been hoping for.

The reasons for this are actually pretty simple. The good news for Gold holders is that they are also likely to be temporary.

It is universally recognized that over the last ten or twenty years, the US and European governments have embarked upon huge public spending. And to fund this spending they have borrowed like there was no tomorrow. Unfortunately tomorrow has now arrived. The focus in the last half of 2011 has been the European debt mountain, exacerbated by political disagreement over how to deal with it.

Historically the value of Gold has been defined by its inverse correlation to the world’s premier reserve currency, the US dollar. This relationship with the greenback while occasionally breaking down has defined the rise of Gold over the 10 year period. And while the slow motion train wreck in the Eurozone has recently supported Gold, it has also caused flight by investors into US Dollars and dollar denominated assets such as US government bonds. This has caused a downward pressure on Bullion that has kept it below $1900 per troy ounce. So as the Eurozone crisis plays out we may well see Gold pulled in opposite directions by a rising US dollar and flight to the perceived safe haven of Gold, these forces largely cancelling each other out.

This situation is likely to be temporary. The debt problem in the US is to many minds the Elephant in the room and dwarfs the debt pile causing all those problems in the Eurozone. When we start to see attention shift towards the US debt problem, is when we will see Gold really start to take off, and this is only a matter of time. Of course that is not to say that a disorderly (even more disorderly than it is now) break down of the Eurozone currency, might not drive Gold temporarily higher. We may even see sharply higher gold prices if Europe gives in to pressure by some of its members and the ECB embarks on massive money printing to bail out the system. But to my mind the big time bomb is US debt and it will make Europe look like a mere firecracker in comparison.

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