Will gold go to $2,000 and beyond?

The dip in the gold price last week sparked talk of a bubble popping. However, after dropping more than 10 per cent, the gold price has clawed back more than $150 since last Friday.

So the question now is what caused the rebound and is gold back in an uptrend?

The low in gold last week at $1,704 came just before Ben Bernanke gave his Jackson Hole speech. Although the Fed President was upbeat about the future outlook for the US economy, he was concerned in the short-run and announced that the September FOMC meeting would be extended from one to two days thus dangling a large QE shaped carrot in front of the markets as a 2 day meeting surely means more stimulus – right?

More like a maybe. The FOMC minutes from the August meeting suggest that the Fed is more concerned about growth than inflation right now. On balance the economic data has been weak (today’s payrolls are expected to be lacklustre) thus the bar certainly has been lowered for more QE, however if it didn’t work the first and second tries, why would the Fed use the same tools this time if they have been proven not to be effective? So the market needs clarification for the Fed before we can think of it as a done deal.

But the mere mention of QE and gold bugs work themselves up into a frenzy. The process of QE involves the Fed purchasing Treasuries from the market thus “flooding” the economy with money, this weakens the dollar, which pushes up the gold price in two ways let’s call them 1, mechanic and 2, capital appreciation. Mechanic appreciation: gold is priced in dollars so when the greenback falls you need more dollars to buy an ounce of gold. Capital appreciation: if the Fed is happy to let the dollar’s value slide then investors need to find an alternative store - and why not turn to the oldest one known to man – gold?

Gold as a currency alternative:

We will have to wait for the Fed meeting on 20/21 September to know for sure if the Fed plans more QE or other policy stimulus. Until then the market will be watching Fed speakers and economic data releases to try and determine if there is a chance of more QE. Added to this, the euro isn’t out of the woods either. This month is packed full of event risk and Greece’s fiscal position is looking more and more precarious. Rumours that it was seeking ways to exit the currency block, and potential delays to its next tranche of bailout funds due later this month is likely to keep investors on edge.

So expectations of more QE/ EU sovereign problems and weakening global growth are all likely to contribute to a fairly range-bound picture for gold over the next few weeks with $1,700 acting as support and $1,900/ $1,950 as resistance.

We think the journey to $2,000 and beyond will be determined by the Fed and QEIII. If we get it then gold shoots through $2,000 settling around $2,200 area. If we don’t then we could see a sell off back towards the $1,650 zone, which is the 50-day moving average.

GOLD ALERT: As we saw last week, although gold isn’t controlled by a single government or central bank, it does get affected by changes to margin requirements. Usually margins are hiked after a strong upward movement in gold, so investors need to be on their guard. Usually this causes a wobble (sometimes a $150 wobble like last week) but these are usually used as opportunities to get back into the precious metal if the prevailing trend is higher.

Looking at the gold price through the prism of FX:

The chart below shows the gold price in dollars (green), Yen (orange), euro (white) and Aussie (yellow). The chart has been normalised to show how they move against each other. The weaker the currency vs. the dollar the more the gold price should rise, so looking at the spread between the gold price in various currencies can be a useful way to see how the FX market moves.



An example: at the start of August the Aussie was sold off more than the euro as the markets became risk averse. This caused the spread between XAU/EUR minus XAU/AUD to widen (see chart below) as the XAU/AUD rose by more than XAU/EUR as the Aussie fell. Since then risk has recovered and the Aussie has started to rise, causing the spread to narrow again as XAU/AUD sold off. It hasn’t recovered completely, and this spread is a good indicator of 1, risk sentiment and 2, the relative performance of the EURUSD and AUDUSD since they are both at the risky end of the FX spectrum.

Источник: Forex.com

02.09.2011