Background
It’s been almost 30 months since the gold bull hit the dizzy heights of $1900/oz back in August 2011, sending many of us into raptures. However, it has been a very different story since then with gold slipping to a low of $1180/oz in June 2013 before bouncing higher to almost touch the $1400/oz level. Fast forward to today and we have gold trading at around $1310/oz level, having tested the June bottom around Christmas time 2013. Many believe that the bottom is now in and the bull has resumed charge, with the bears being exhausted. We would like to agree with them but we are still of the opinion that a challenge to the June lows could still lie ahead of us.
Gold
Gold prices are presently being dragged in both directions with the geo-political issues in the Ukraine putting upward pressure on gold as it is viewed as a safe haven in terms of protecting ones wealth. Gold is something you can take with you should the need arrive and you have to move to a safer location in a hurry. However, for many of us our need to own gold is based the perennial devaluation of our own countries currency.
In the world of paper money it is difficult to think of a country where the government is not actively trying to devalue its own currency via various forms of money printing.This form of monetary policy is a short term fix at best as it does not address the basic problem of competitiveness via increased production and better working methods. This is something that we have to live with as our political leaders prioritize their survival through to the next election, rather than do what is best for the longer term.
We have written previously about a possible final capitulation and about monetary policy so today we would like to bring to your attention two other factors that deserve our consideration regarding the direction of the precious metals sector; they are Backwardation and the performance of the US Dollar
Firstly, Backwardation in the price of gold is now more persistent than ever which tells us those investors will pay a higher price today in order to take delivery and secure their purchase. To actually pay now and then have to wait months before your gold is dispatched has the inherent risk of it never being dispatched and/or some sort of cash settlement being offered if an order cannot be completed. To be willing to pay more money today for gold than buy it cheaper in a few months’ time suggests a lack of trust in the current system of futures trading.
Secondly, the US Dollar has an adverse relationship with gold so when it rallies gold prices tend to fall and when the dollar falls gold tends to rise. We can see on the chart below that the dollar is struggling to hold above the ‘79’ level on the US Dollar Index, however it has been there a number of times over the last year and survived the drop.
For the rest of this column, click here: http://www.kitco.com/ind/Kirtley/2014-05-07-Gold-Prices-The-Coming-End-To-This-Bear-Phase.html