.Gold and silver have both performed well over the past week, and with the weak dollar
Author: Lawrence Williams
Posted: Saturday , 22 Sep 2007
LONDON - We published the following comment on Wednesday: "A Reuters poll of traders and analysts has found expectations were that the gold price may reach $730 this year!" We added that it would seem more likely that gold would reach $730 this week. In the event it took about 24 hours to reach the $730 mark! I think this demonstrates that Mineweb was more accurate in its call than the Reuters poll of professionals - even though both statements have been proved technically correct.
However, if one goes to traders, professional analysts and bankers for your precious metals price predictions - in many cases predictions upon which huge sums of money are made and lost - they are invariably ultra-conservative, both on the way up and the way down. No-one is prepared to stick his or her neck out and sometimes take what would seem to be the real commonsense viewpoint.
Of course there are plenty out there who make a living by making far out predictions on price movements, and in the precious metals arena it tends to be the bulls (the gold and silver true believers) who outnumber the bears quite dramatically. Only problem here is that they were bulls when the gold price was going down and drifting. If you hang in there long enough in what tend to be cyclical markets you can always at some time be proven correct.
But, this week the gold price has definitely been moving in the direction the bulls would suggest. Since the jump through $700, the price has moved up fast - to the high $730s at one stage before settling back to remain just above $730 at the end of the week, with a short-lived blip below this level at one time on Friday. The question now is whether it will hold this level, move up again or fall back - the perennial question facing investors!
Barring any specifically gold price depressing news, the likelihood would seem to be for further increases, and given the speed at which gold passed first through the psychological barrier of $700 - and then into 27/28-year high territory, one certainly can't rule out a move to the high $700s - or even to $800 or more by year end. The fundamentals for such a move upwards are convincing.
There has been comment though - not least from Mineweb correspondent Rhona O'Connell of specialist consultancy GFMS Analytics, and quoted on Bloomberg on Friday, that she felt that the surge had been overdone and the price was due a correction - which duly happened within hours! However, as noted above, the metal did manage to hold the $730 level - even if only just.
As we have preached here before, higher gold prices are very much a sign of US dollar depreciation and there is no doubt that the greenback is weak - and probably likely to get weaker. As pointed out by out by Andrew Leonard on Salon Media Group's website, Salon.com, in an article criticising a UK Daily Telegraph article on Saudi Arabia's approach to the dollar:
"From an international perspective, the United States has been living on credit for years, with foreign investors acting as enablers through their insatiable appetite for U.S. Treasuries and other dollar-denominated investment vehicles."
"There is a self-fulfilling prophecy aspect to the dollar's downward journey. A weak dollar pumps up the pressure on holders of dollar-denominated assets to diversify out of dollars, which only ends up making the dollar even more infirm. In that type of market, traders get increasingly nervous, to the point that even a sketchy piece of journalism by a historically unreliable narrator [Leonard's description of Daily Telegraph's Ambrose Evans-Pritchard] can make speculators all over the world push the sell button."
It is indeed frightening that the serious media does have the power to move markets on the opinions of perhaps one commentator who may have an view, or theory, which isn't necessarily matched by that of his peers. In this kind of climate a few words can make or lose billions of dollars. It is perhaps disturbing also, for instance, that Alan Greenspan now seems to be hitting the talk shows with new opinions which do not necessarily match those he promulgated when running the US Federal Reserve, perhaps in the guise of publicity for his new book of memoirs.
But, enough diversion. The dollar is looking weak and therefore gold is looking strong - in US dollar terms at least - as indeed are many other commodities. But gold probably has the edge for the time being. Should dollar weakness ultimately move the US economy towards zero or negative growth, commodity demand will likely weaken - apart from gold which could strengthen further.
In this case too, undoubtedly silver will follow suit, and it has been interesting to note that in the recent gold price runup silver, which had been being left behind, is itself moving up more strongly again. It is still off its recent high point though, while gold has soared back up through its May 2006 level, so silver now looks perhaps an even better buy with a greater percentage upside potential at least in the short term. It was also notable that when gold fell back a little at the end of the week, silver, for the most part, held on to most of its gains ending the week at around $13.50 - but still well off its early year high point of around a dollar higher - which gives an indication of the potential in current markets.
Longer term who knows? At the moment precious metals look good for continuing real increases, but a dollar rally - and stranger things have happened - could rapidly reverse the trend. A world economic slowdown could impact industrial metals prices, but not necessarily precious metals - but even this doesn't appear to be in sight in the short term as Chinese growth continues to surge and other rapidly growing super-economies like that of India continue to move forward. The pattern is that developing economies are beginning to grow as much through internal demand as via exports which is gradually changing the balance of economic power throughout the world.
At some stage a slowdown is probably inevitable and the commodity boom may come to a temporary end. But as long as the dollar sinks, gold (and silver) will grow. At least that's the theory. Gold does have a habit of proving people wrong from time to time, but the odds look stacked against this happening in the near future. Gold could be flying - hang on and enjoy the ride.