Gold May Be In For Choppy Ride

In ther latest column, Geena Paul points out that a letdown in gold may come as a result of the Eurocrisis being stopped in its tracks (for now, anyways.) The nub of her case is high prices dampening demand:

There are indications that the high gold prices won’t last long. As more and more people have become aware that the high prices of the yellow metal are not going to last, they are slowly shifting to other commodities which offer a guaranteed profit much more than gold. If you take the case of China, people started looking for other options like diamonds and platinum instead of gold as the cost of the metal is very high.

Also mentioned by her was a forecast by Société Générale for $800 gold by the end of the year:

The latest quarterly Commodities Review from the bank notes that in late March the major Exchange Traded Funds held 1,589 tonnes of gold, which was a twelve-month increase of 656 tonnes (since then they have added a further 14 tonnes), but that more significantly they had acquired 390 tonnes since the turn of investor appetite in mid-January. Between then and early February there were only nine days on which there were net redemptions and six of these were concentrated between February 24 and March 6. During that period, just four tonnes were sold from the funds, but the loss of this inward investment momentum took 10% off the price over that period plus a further three days.

Noting that investment activity is clearly not the only price driver in the market, the bank points out that it is currently one of the few bullish influences. Absorption of 198 tonnes into the funds in the first three weeks of February accompanied a price increase of $80 or 9%, and then flat activity in the two following weeks saw that gain wiped out, highlighting the importance of sustained investor purchasing if international prices are to remain high.

It seems time to be cautious, but the above-summarized forecast is a little extreme. $800 gold would represent a more than 50% decline from the December 2nd peak.