Gold cracked the $1,000-an-ounce barrier for a second time last week, and the New York spot price kept hovering around that four-digit mark. The first time this happened, in March 2008, the price plummeted to the low $900s within a couple of days. No one knows what gold will do this time around, but there are some plausible reasons why the price could stay higher longer.
Fundamentals
The first reason?September is gold?s best month of the year in terms of month-over-month price appreciation, the key driver being jewelry makers stocking up for buying in Asia led by India, the Middle East and North America. This strength historically lasts until February.
A second reason relates to the weak dollar due to prolonged rock-bottom interest rates and massive deficits being piled up in the US Gold and the dollar typically move in opposite directions, so a weak dollar tends to be good for gold. That inverse relationship is intact so far in September-the DXY dollar index had lost 2 percent of its value through last week, hitting a 12-month low, and over the same period spot gold has risen about 6%.
A third reason is rebounding interest in commodities overall. Prices for copper, zinc and other metals have seen strength recently. This isn?t surprising, given the growing signs of economic recovery and the dollar weakness.
There is a growing concern that a global economic recovery will unleash inflation. Stimulus spending by the Fed and central banks around the world has added several trillion dollars to the global money supply. This will eventually erode the value of the dollar and other currencies.
Technicals
After bottoming out about $250 an ounce about nine years ago, key fundamental catalysts such as increasing demand, lower supply, inflationary fears and a flight to safety have been driving the price of gold northward. But gold is like any other financial asset in that prices don?t rise in a straight line?especially if they?re rising a long way. But they follow a clear and discernable pattern.
As asset prices rise, they often initially overshoot. Then they ?correct??fall back a bit. Then they ?consolidate,? or trade sideways. It?s this period of sideways trading that creates the horizontal ?step? in the ?Golden Staircase?? a technical-analysis tool that lets us ?see? the foundation for the next step up in the long-term uptrend in the price of gold.
The formation of the newest ?step? in the staircase was started in mid-2007. That?s when the $1,000 price level was first breached. On Tuesday, September 8, when gold prices eclipsed that key barrier, it was the fifth time it attempted to do so.
Each of these attempts has helped define $1,000 as a ceiling. But in a ?golden staircase,? the ceiling eventually becomes a new floor. So once the $1,000 price point is eclipsed in a decisive manner, it will become a key ?support level? for gold prices. And that?s precisely the juncture where gold finds itself right now.
As long as the global economy is transmitting mixed signals, gold stands to benefit as an uncertainty hedge and a store of value. How long the price is in the $1,000 range or higher remains to be seen, but this unusual convergence of factors creates favorable conditions for gold investors.
?The writer is a derivatives analyst