Gold – The Latest Surprise

Gold has once again surprised. This time, news from “outside the market” set in motion a chain reaction that knocked gold for a loop.

First, the British confirmed the country was withdrawing from the European Union . . . and sooner than most had expected. This triggered an instant devaluation of the British pound and a corresponding rise in the U.S. dollar in world currency markets.

Not surprisingly, as the dollar rose, gold took it on the chin, as it most often does when the U.S. currency appreciates.

At the same time, contributing to the dollar’s recent appreciation has been a string of favorable U.S. economic statistics that, in turn, raised expectations the Fed might sooner rather than later raise short-term interest rates, perhaps even by yearend.

Once the dollar started its ascent, gold’s short-term fate was sealed . . . and its downward decline was further fueled by technical selling at key chart points, much of it computer driven, that is to say without any human intervention!

Now, most immediately, having shed some $75-to-$100 an ounce in a matter of days, we are seeing some technical support and bargain hunting as gold tests the $1250 level.

If this key chart point holds, as I think it will, gold could soon be on the upswing again. But if it can’t hold, watch out for another possible washout prompted by a further wave of technically-driven speculative selling that takes gold down another notch before a long-lasting upswing gets underway.

Giving us some comfort has been the observation that much of the recent selling has come from large-scale speculators operating in futures and forward dealer markets. Meanwhile, physical demand from retail investors and, most importantly, hedge funds and other large-scale institutional investors has remained firm.

Lately, as gold prices have dropped, these institutional players have added to their holdings via exchange-traded funds (ETFs). Gold ETFs now stand at over 2000 tons, near the highest level in over three years. I expect this market segment will continue to grow – especially as some fund managers seek bargains at recently depressed price levels.

Adding to my sanguine view of the recent price decline has been the absence in recent days of Chinese participation in the market – either as buyers or sellers. China is the world’s largest gold market – and ordinarily one might have expected the Chinese to easily absorb much of the gold sold this past week in the United States and European markets.

When Chinese investors return, at whatever price level, they’ll sense a bargain. And, their buying alone should be enough to stabilize the price and re-launch gold on its long-term upward trajectory.