Gold status

Unlike the status of oil, which is pretty clear right now, the status of gold is more complex. Gold demand is governed by exchange rate uncertainty and monetary inflation. We see conflicting trends of uncertainty and deflation, with rapidly changing monetary policies, which causes unpredictable results.

We have seen a rally fueled almost entirely by Chinese government. This is a cause to worry, since we see stronger dollar at the same time. Apparently countries do not trust each other’s monetary policies and prefer to stock gold. At the same time we see slower growth in China, partially due to real estate bubble ready to burst.

China is the largest producer of gold in the world.
One may speculate that after ECB and FOMC policies become clear, China’s buying spur will stop and the gold will settle down again. Also it is not entirely clear how the countries are going to use their gold reserves, especially in deflation environment. With current deflation raging [due to QE induced overproduction], the rally may be short-lived and over time gold may fall in value back to the 1000 support level or below.

We quote:

Central banks in Brazil, Russia, Ukraine, Nigeria, and others have raised interest rates. Central banks in China and India have cut rates. The U.S. Fed has ended its QE stimulus program, and is contemplating when it should begin to raise rates. The European Central Bank (ECB) is widely expected to cut rates and launch a substantial QE stimulus program at its meeting next week.

That was enough uncertainties to support gold beginning to rally off its November low. Those uncertainties became alarming with this week’s surprise move by Switzerland’s central bank to abruptly end its long-standing and long-defended cap on its currency.

With the unexpected lifting of that restraint (no forewarning), the Swiss franc surged up in value. Switzerland’s stock market plunged. The fallout rocketed around the world, hammering global banks, currency trading firms, and foreign exchange (FX) investors with large losses. It has already triggered the collapse of some smaller FX brokerage firms and raised fears of the turmoil spreading to other areas.

So gold’s rally seems to be supported by both a technical breakout and the fundamentals.

For the moment, it should be considered a promising intermediate-term rally, but not necessarily the end of gold’s bear market. That will be determined by how it handles resistance in the area of $1,400 an ounce, where its last two intermediate-term rallies topped out.

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