Uncertainty Over Gold

A long Commodity Online article by David Lew, featuring commentary by market letter writer Howard Katz, digs into the thesis that speculators have driven the gold price higher. Using demand data from the third quarter, and the still-high net long non-commercial open interest for gold futures contracts, the article concludes that speculation was the reason. Although open to the possibility that gold will continue rallying, it contains these paragraph after going in to speculators' open interest:

An important factor is that under present economic circumstances, there is less money with which to buy jewelry or to invest in commodities, gold included. This is reflected in the low level of demand in the latest reports.... Demand for jewelry which usually represents about 70% of demand for gold was down 32% in the latest reported quarter (third quarter of 2009).

The gold price could potentially fall to near $500 in a relatively short time. As an example, after gold rose sharply in 1979-1980 to $850 it was followed by a drop to near $500 in less than 2 months. It will not be surprising to see the gold price take a similar loss in a short time.

Katz is less bearish than uncertain. He also holds up the possibility of gold going to $1,500/oz or $2,000/oz if U.S. dollar weakness continues. One possibility not mentioned is gold staying about where it is.

Along this line is a point/counterpoing write-up webbed by the Sydney Morning Herald. The first expert quoted, Evans and Partners analyst Cathy Moises, has a bit of an unusual call: short-term neutral, long-term bearish. Her call is based upon gold as a crisis hedge, and a forecast that recovery is in place. As fears ease, so will the attractiveness of gold. Three other experts quoted in the report think that gold will rise next year, with the U.S.' fiscal position and Asian demand for gold cited as reasons for the bull market to continue. Interestingly, all four expect a trading range in the near term.

A report webbed by iAfrica quotes a different analyst which concurs with Katz's conclusion that speculation drive the price up in November, for similar reasons. However, the Resource Capital Research report analyst quoted forecasts a trading range between US$1,000 and $1,100/oz.


Speaking of demand: this report from the Israeli Diamond Industry news portal has this to say about Chinese jewelry/physical gold demand:

China Daily reports that gold jewelry sales soared by over 30% during the past weekend in Beijing, with bargain shoppers heading for the city's major jewelry stores to take advantage of end of the year promotions....

I haven't seen any indication that the demand surge has been duplicated in India, however.


All in all, a picture that shows real uncertainty about gold's fate. The November run-up, and December run-down, have shaken more than a few analysts and left a lot of caution in its wake. The big near-term variable is the U.S. dollar, which took a lot of people by surprise when it surged up this month.