High oil prices and a weak dollar are both currently in play and should at least lead to consolidation in the gold price in the short to medium term – and probably lead it higher.
Author: Lawrence Williams
Posted: Tuesday , 11 Sep 2007
I'm sure gold followers will find it significant that this time around gold
has already remained above the $700 an ounce mark longer than it did when it shot up to peak at around $730 in May 2006. On that occasion the rise above $700, and the rapid fall back again back below the $700 level took place in the space of only around two days! That suggests today may be the crunch day - and prospects are looking bright so far.
Two of the major factors which many analysts feel are key to gold price strength - a strong oil price and a weak dollar - are both in play at the moment and if this situation continues, and there's little reason to suggest it won't, then the gold price should at the least consolidate in the $700-$710 range - and possibly move forward from that. Paul Walker, CEO of specialist gold analysts GFMS, speaking to Mineweb/Moneyweb on Friday felt that perhaps as much as $750 was in sight in the short term, but beware a sudden spike in the price. On past experience a big gold price spike can be just that - a spike - and the price can come back as fast as it goes up.
The safe haven concept for gold also seems to be coming into play again as financial turmoil continues to stalk the stock markets. Initially gold did not perform as some would have hoped as a general liquidity crisis forced some holders to sell to meet demands on their resources. But the sales were shortlived and gold did not fall back to the extent the general markets did and has made a rapid recovery since, even though the general liquidity crisis has not yet unravelled fully - nor is it likely to do so for some time to come.
The general recognition that the downside on the gold price is limited, while that on some stocks at least may not be should keep the yellow metal moving positively. The likely scenario would seem to be a period of consolidation (probably a short one) at current levels, and then a step up to the next trading range and so on. But there will likely be occasional setbacks on the upwards path as we have seen in the past year.
The metal itself and ETFs may be a better investment bet than gold mining stocks, although the potential leverage in the latter is better if there is a sharp price rise. Most of the majors have now effectively liberated their hedges so the gold price received will be strong, but miners of all types are facing cost pressures which are limiting profit advances - and these pressures will not be helped by factors like higher oil prices and the general strength of most commodity prices which are already filtering through into the manufacturing cost of mining equipment and supplies.
Overall, as I see it, the outlook remains positive while market conditions remain as they are. Onwards and upwards!