Mineweb: Volatile gold tracking backwards through $800

The recent gold price surge has been shortlived again as a dollar rise has led to a fall back to below the $800 level and may move lower. The gold price thus continues to be very volatile moving up and down on dollar strength perceptions.

Author: Lawrence Williams
Posted: Wednesday , 28 Nov 2007
LONDON -

If you want to take a view on gold and where the price is going you have to first take a view on the US dollar. Gold moved sharply upwards on a falling dollar last week, but this week, as some strength has been seen in the US currency, the gold price has rapidly tracked back downwards through the $800 mark - and if the dollar stays where it is, or shows even the smallest sign of strength - however temporary - we could see a return to the mid to high $700s over the next few days.

But, if the dollar starts to move lower again against the major currencies, gold will almost certainly bounce back upwards, and whether it achieves the $850 all time high in the near future will depend almost entirely on the weakness, or perceived weakness in the greenback in the next few months.

If US interest rates move down another quarter point, as many feel likely, then the dollar value against the basket of currencies will probably move down again too and gold will likely move up. If the Fed decides against cutting the rate, then this could be seen as a positive sign for the dollar and gold could slip back as a result to the mid $750s.

The dollar weakness is also being curtailed as non-US economies may also consider cutting their own interest rates to try to ward off any business downturn as a result of a static or contracting US economy, and their own industries becoming less competitive internationally against US output as the dollar declines.

But, gold production worldwide is, at best, flat and probably falling, and with the cancellation of major projects like Galore Creek, coupled with a credit crunch which could see more marginal or risky projects struggle to raise development funding, the decline may be greater over the next few years than analysts have been estimating.

There is also an impression that the rate of Central Bank gold sales may be declining in the face of higher prices and there are indications that some banks may even be buyers in the market to increase the size of their foreign reserves.

The pattern makes for increasing gold price volatility, such as we have been seeing over the past few weeks with recent short term peaks and troughs in the gold price being up and down as much as $70 an ounce - perfect for smart traders to move in and out of the metal and make good profits if they judge the market right - which in turn increases the volatility quotient.

Overall, though, not withstanding worldwide currency manipulation and the impact of various Central Bank policies, the trend in the dollar value remains downwards for the moment, and the gold supply situation is not likely to improve. There is additional offtake from the market through ETFs, although of course this can be divested more easily too. So, gold price fundamentals remain good, dollar fundamentals remain weak and thus the medium term gold price outlook should be very much a positive one.

If there are any serious shocks ahead for the US economy - which is certainly a possibility - and the dollar moves back down again, the gold price will rise and re-test recent peaks. It will be the strength or otherwise of such a dollar decline which will determine whether gold will at last breach the $850 level, but the general consensus of market followers is that this will happen sooner or later, but exactly when few are prepared to define.

Analysts also cite the oil price as being a driver for gold, but it seems more likely that dollar strength or weakness is both the driver of the oil price and the gold price, as both are traded in US dollars. Oil, though, is more open to market manipulation by the producing nations which can increase or reduce supplies at very short notice - an option not really open to gold miners.