Top 5 Explanations Of What’s Going On With Gold

My first year in gold investment has actually been pretty boring when it comes to the gold price. Since September 2011’s price peak, gold has generally moseyed between $1500 and $1800. At first things were quite exciting, it appeared to respond well to Fed stimulus announcements and Eurocrats’ attempts at damage control, but in the last couple of months it has been tedious, if not disheartening.

The last few weeks have seen more knockdowns to the gold price than anyone can be comfortable with. At the time of writing the gold price sits at $1,660 with the next support level seen at $1,625. What’s worse is no one can see a clear explanation. Of course basic economics tells us that the price has dropped because there is simply more being sold than bought. But why is this? The truth is, as anyone will tell you, no-one really knows what has upset gold but the following are some of my top explanations I’ve seen around the place.

Gold demand responding to changes in nominal yield expectations
Rate settings across countries are significantly low, in fact they can’t go much lower. Gold, often criticised for offering no yield, responds positively to low yields. But, when nominal yields are pushing close to zero, there isn’t much further gold can reach to.

Despite appearances, the US economy isn’t suffering too badly at the moment, with it expected to improve significantly next year thanks to a 12% increase in industrial production this year, an improved housing market and increased auto-sales. There is a chance people are coming around to this new approach to managing the US economy, plus if the economy does show signs of improvement next year the Fed will have to increase rates, putting further pressure on gold.

Unwinding of long-gold/short euro trade
Greek woes, amongst other eurozone issues, over the summer saw an increase in long gold/short EUR positions as individuals bet that gold would rise against the crisis riddled euro. However no country has defaulted on its debts, no country has exited the eurozone and the currency has just hit a seven-month high. Draghi’s magic two sentences and the OMT pledge appears to have muted market volatility.

Thanks to a quiet period over in the eurozone we are now seeing an unwinding of these positions. This month as things go for the eurozone they haven’t been too bad; we have seen the initial stages of a banking union, the bailout of four Spanish banks and a new bailout deal for Greece.

But we need to ask ourselves if the calm now is a sign of things to come across the single currency union. Probably not. The economy is set to shrink by at least 0.3% next year and many remain unconvinced of weaker countries’ abilities to service increasing government deficits without asking for aid. European stocks appear significantly overvalued in relation to PMI data suggesting they could move a lot lower and European governments are consistently failing to meet economic targets.

This correction is normal
If you look at a gold price chart spanning 2000-2012, you will see that the current price correction is similar to that seen in 2008. Whilst it is clear that this is a slightly longer correction, it has been correcting for nearly 16 months now. According to Jim Rogers, gold is long overdue a correction and through history we can see bull markets experiencing a 30% correction "every year or two." Rogers reminds us that we have only seen one correction in this gold bull-market and that was in 2008.

There are too many bulls hanging around
Sentiment is changing in the market. Not only are the gold-bugs bullish but the banks are as well. Gold investors have become almost too reliant on the results of further stimulus packages. Jim Rogers believes there are just too many bulls in the market at the moment. Gold needs a bit of a shake-out.

Short-term traders, not the gold-bugs, and those looking for a break-out above $1,700 in the last few weeks have been disappointed, with private investors supporting the price. However, as gold has failed to break above $1,700 they have been stopped out triggering sales of gold.

Someone wants to create a sale-price
Rumours of manipulation have had more velocity in the last month than I’ve noticed in the last year. The jury’s out on this one from our perspective, but whoever it is that’s putting these huge trades into the market, they’re not particularly price sensitive.

Those worrying about the gold price at present are looking at the short-term view, much like those who have caused the price to drop. The original gold investors those such as Jim Rogers, remind us that the long-term view of gold is still bullish. “If gold goes down – I hope I’m smart enough to buy more. If it goes down a lot, I hope I’m smart enough to buy a lot more.”

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