For quite some time now, global economic uncertainties, geopolitical instabilities, continued availability of easy money, build up of inflationary environment and lacklustre stock markets all combined to support gold prices that have been testing $1,800 an ounce.
Until about 10 days ago, at around $ 1,750/oz, gold was able to hold on to its recent gains driven primarily by investor interest, rising ETP holdings and of course high speculative long positions on the Comex.
However, despite all the supportive factors — favourable macroeconomic backdrop and investor support — gold has faced some solid long liquidation in recent days. In the London and New York markets earlier this week, prices fell well below the psychological $1,700 an ounce. And investors booked profit.
What went wrong? Nothing, really. This is yet another instance of the fickle nature of this market driven primarily by speculative investments, whose wont is to propel prices inordinately higher without regard for the fundamentals and then force prices down sharply once the profit objective is achieved.
Some analysts attribute the price fall to stronger dollar and the Fed Chairman not signalling further asset purchase or quantitative easing. It is simply that less-committed investors decided to exit the market early. Obviously, there are concerns about the sustainability of gold prices at the current high levels which actually hurt physical demand.
One must hasten to add, investor interest is not waning. Net speculative longs on the bourses are still high, although well below their peak. ETP inflows too have been solid but not spectacular.
Where, from here?
Where would gold prices go from here? One of the most interesting features of the gold market in recent years is that whenever prices made sharp corrections, physical demand stepped in to support the market. It is likely to happen this time too.
Without doubt, the near-term hurdles for gold are still in place. Dollar strengths, broad risk reduction and profit taking are sure to pressure prices down. There is also a view that what's happening is a healthy correction. So, buying on dips could be a good strategy.
It must, however, be stated that there is no mistaking the gold-positive nature of broader global macroeconomic situation. The US has a negative interest rate environment which , it is believed, is unlikely to change until 2014.
Elevated crude prices create inflationary concerns and the European sovereign debt issue is far from resolved. Equity market performance is yet to inspire confidence in a sustained manner although leading indicators of growth are signalling positive momentum.
Under the circumstances, it may be too early to say that gold's price performance has lost steam. Yes, there is a correction and it is believed to be a temporary one before a longer term move higher commences.
But large moves upwards will also be accompanied by profit taking and correction for which market participants have to be prepared. Gold is an eternal favourite of investors and will remain an asset class or vehicle of investment.
However, if there is sustained flow of positive macroeconomic data, reduction in geopolitical tensions and improvement in equity markets, gold will see an even more healthy correction — one that will be consumer-friendly and help improve physical consumption.