Gold is on the move again. The yellow metal has eclipsed $700 an ounce for the first time in 16 months and is within sight of May 2006’s 26-year high of $730. Gold appears to have broken out to the upside and begun “a new bull market upleg”, says technical analyst Martin Pring of Pring.com.
The fundamentals look encouraging too. Gold’s latest move was spurred by last Friday’s weak US jobs data, which weakened the dollar – now at a 15-year low against a basket of trading partners’ currencies – as it fuelled expectations of lower interest rates in the US after next week’s Fed meeting. The prospect of more rate cuts as the Fed tries to temper the impact of the credit crunch implies further weakness for the dollar and upward pressure on inflation, which risks eroding global confidence in the dollar as a store of value. Throw in the prospect of a deepening credit crunch and it’s no surprise that gold is regaining its appeal as a safe haven.
Note too that gold is once again appreciating against all currencies (it is at a six-month high against the euro), which points to “a long-awaited rerating” and is a phenomenon that accompanies gold’s “best upside moves”, as David Fuller notes on Fullermoney.com. The supply and demand picture is also improving, as Robin Bhar of UBS points out. Physical demand is on the rise in India – which consumed 50% of global mine output in the second quarter – China and the Middle East. Global demand rose by 11% in the first half, while supply fell by 4%. Given all this, it won’t be long before gold hits $730, says Bhar.