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The Commodities Corner

The Long−term Outlook for Gold

Wed, Oct 15 2008, 16:04 GMT
by Andrei Pehar

fxKnight.com

Traditionally thought of as a safe-haven during periods of high inflation or market uncertainly, this shiny yellow metal has been moving by over $100 per ounce on some recent days.  But there's more to the story than just the recent market panics.

The day prior to the first "no" vote on the US bail-out package, gold made it's bottom at 736.18, a level projected nearly 2 months in advance by Fibonacci studies.  But besides the technical indicators, there is a genuine fundamental supply and demand issue unfolding.  The truth is most every bank, bullion, and coin dealer out there is out of stock.  And some have even ceased accepting waiting lists and back orders.  Try it yourself - just call one.

So in a period of growing demand amid uncertainty about both the markets and inflation, the supply is virtually non-existent.  Except perhaps on eBay, where will find some $10 silver coins selling for 25 to 30 Euros (and an ounce of gold for over $1000).  Considering the situation, perhaps eBay is a better market thermometer than the London spot fix rate?

So why isn't the rate rising sharply as a result?

The other half of the equation are all of the funds currently being forced to liquidate assets.  Those assets include gold and silver.  And when a fresh supply suddenly hits the markets, we see the dramatic one-day drops like we've been seeing.  A fund essentially waits for the best price they can get (often a technical level), then takes advantage of the selling opportunity.  The newly available gold is then quickly snatched up by the biggest bidders, creating the sudden reversals back to the upside.

The result has been the current range of 830.93 to 926.70.  If 852.52 continues to hold as resistance, then we may well see more selling.  After all, the funds are not quite finished liquidating yet.  The IMF has also been raising cash by selling roughly 1/5th of its gold reserves (about 400 tons worth) in small gradual amounts in order to avoid disrupting the markets.  Any further drops will likely find support in the form of eager buyers at 808.31 and 735.13

If we can get above 853.52 and that level successfully holds as support, then another run to 926.70 seems likely, with some sellers waiting at $900.  A break of these levels brings secondary targets into view at 1044.44 and 1117.22

Overall, it would not be surprising to see gold somewhere around $1250 to $1300 per ounce within the next 12 to 18 months ($15.99 for silver).  However the ride up there is likely to be anything but smooth.

Published on  Wed, Oct 15 2008, 16:41 GMT