Gold loses its lustre

23rd May 2012

But that has not happened. The price of gold has fallen by some 20 per cent to around $1,540 from topping $1,900 late last August. A few weeks later, Mindful Money warned that this was probably as far as it went.  It was – gold hit $1,920 in early September and has never subsequently seen that level again even though the economic conditions cited by fans of the metal have remained largely unchanged, possibly become worse.

Market fall fails to deter gold bulls

None of this stopped the gold bulls who still intoned their tune that gold was the answer to the economic woes of the world. And the fall in the price of gold – admittedly to levels which are still substantially ahead of its long term position, has not deterred enthusiasts from trying to talk up the price – in some cases to as high as $5,000 or more an ounce (or more than three times the current price).

But before looking at forecasts and the reasoning behind them, and the fundamental bear case for gold, investors should look at the technical position. If the price slips below $1,500, it will be the lowest since March 2011. More importantly, after hitting the September high, the market has tried – and failed – twice to recapture the heights. The long term moving average is distinctly negative. 

The fundamental reasons for gold falling further

But for gold bulls, the fall of a fifth is just a technical correction on the way to $2,000, $2,500 or even $5,000.

The first stage price rise scenario

Let's start with some modest predictions.

"Rising fears about Spain will send a fresh flood of investment towards the "safe haven" metal, according to the annual report from Thomson Reuters GFMS issued last month.

GFMS analyst Philip Klapwijk, said: "We could easily see last September's record high being taken out."

"A push on towards $2,000 is definitely on the cards before the year is out, although a clear breach of that mark is arguably a more likely event for the first half of next year."

In March, Reuters reported Newmont Mining CEO Richard O'Brien saying a weak dollar and demand from China and manufacturers will drive prices of the precious metal above $2,000 this year or early in 2013.  Newmont benefits from higher gold.

Upping the ante to $2,500

Hard Assets Investor blogger Amine Bouchentouf cited five fundamental reasons for gold moving to $2,500 this year back in December 2011. These included eurozone instability, central bank and consumer demand, and safe haven status.

He concluded: "When you add up the tight supply scenario with all the bullish demand factors, gold prices have only one place to go, and that is higher." At the time of writing, he says he was long of gold.

The Calgary Herald reported Capital Economics forecasting gold rising to $2,500 an ounce and commodities will plummet if the euro area starts to break up.

"Greece may leave the system this year, followed by Portugal and Ireland in 2013," Julian Jessop, chief global economist at the Capital Economics macroeconomic consultancy, told a London conference in February.

Going for $5,000

Egon von Greyerz is founder and managing partner at Matterhorn Asset Management in Switzerland, and is even more bullish. Also in February this year, he predicted gold at $5,000 within two years.

He reasons: "The risk that many banks will fail is major. The authorities and central banks, around the world, are going to try to rescue them, but it's not certain they can or will.  That's why, again, it's important to hold assets outside the banking system, whether it's gold or silver or assets in the ground. That's the way to protect yourself because if the system survives in the next couple of years."

The sky's the limit

The Aden Sisters are prepared to predict gold rising to $10,000. The Aden Sisters, whose website claims their newsletter "is one of the most influential and successful investment publications in the world today.

It has been written and published since 1982 by Mary Anne and Pamela Aden. It boasts its "powerful advice have consistently prod
uced double-digit profits for investors in 21 out of the past 25 years".

Their love of gold is nothing but consistent. In the mid 1980s, the Costa Rican sisters told followers that gold would eventually hit $3,000. They are still waiting. 

It's almost impossible to find bearish commentators. Why? The media love the gold will soar story while those who are sceptical of the metal spend their energies analysing equities and bonds.


More on Mindful Money:

Is gold losing its shine?

Gold: A risk asset?

Gold – Will the bulls come back?

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