Gold Shines in Cloudy Skies

By Michael Montgomery—Exclusive to Gold Investing News

Gold prices have been surging over the past 3 trading sessions. Morning trading was quite volatile with a peak price at over $1462 per ounce, which may be a resistance point, as the price fell to $1454 by mid-day. In the afternoon, price regained its upward trend. Since early April, the price of gold has gained more than $40 per ounce, up to $1459.00 in New York at close. Silver has also been on the rise with a key resistance point at $40 per ounce, at close the price was up $0.23 to $39.51. This upward momentum continues to be driven by high oil prices, loose monetary policy and consequentially inflationary fears. The dollar has continued downward trend as the monetary policy from the Fed, mainly QE2 seems to be creating a bearish tone for the greenback. While some economic data in the US has been favorable as of recently, the dollar index is not showing much strength. The continuing high price of Brent Crude Oil, now over $121 furthers fears that inflation is going to start impacting the economy.

The US dollar woes should get help after QE2 is ended in June, reducing inflationary risk. It will also eliminate a major component of some gold bugs argument of out of control Fed measures of increasing the money supply. The fed may even move to raise interest rates. “Allowing some rates to move higher, as long as they don’t crush economic growth, could actually favor the dollar and could help reduce some commodity prices… That would have a positive feedback on growth and inflation,” stated Bill Cunningham, co-head of global active fixed income at State Street.

Inflation seems to be the ruler of the day. Inflation in China has been a main concern of the country’s central bank, in accordance the bank has raised interest rates by 25 basis points up to 6.8 percent, marking the fourth increase since October. “[Economists] are becoming fearful of an inflation outbreak. Credit Suisse’s China economist has forecast that rates could climb as high as 8.3 percent,” reported Michael Sainsbury, for The Australian. The increase in inflation in China may be due to the 4 trillion yuan stimulus package in 2009, however, high energy and food prices are only making the issues worse.

Analysts see the next psychological resistance level to be at $1500. Adjusted for real dollars the all-time high price for gold is around $2250 per ounce in 1980, todays gold price still has a way to go. The geopolitical events of 1980 seems to equal the state of affairs in the world today. High unemployment figures, turmoil in the Middle East, high oil prices and high inflation all contributed to the historic price. The gold bubble burst shortly thereafter.

There are negative factors on the side of gold’s impressive bull run. As noted earlier, China’s central bank is raising interest rates and so too is its Euro counterpart. The US is ending QE measures signal that loose monetary policy may be coming to an end reducing the inflation ammunition in gold bugs’ arguments.

“[T]he US economy is now growing at a much faster clip, with even the sluggish labor market finally stirring. We therefore will likely see rates continue to move up over the course of the spring and summer months, helping limit the recent weakness we have been seeing in the dollar which, in turn, may help temper the commodity boom,” stated a report from MFGlobal.

A recent Barclays Capital survey of institutional investors stated that most will continue to invest in commodities, however, when asked about gold, many views differed. “A significant amount of respondents suggested that gold has already reached its peak level and has very limited upside potential. It will need a radical catalyst to keep on its nine year upward trend,” reported Dr. Osman Gulseven, for Seeking Alpha.

In India, the largest consumer of gold, accounting for 32 percent of world consumption is on the wane because of high prices. “Morgan Stanley’s recent estimations that bullion demand in urban India might suffer a 16% decline this year,” stated Jon Nadler, for Kitco.

While there gold still has a way to go before hitting the historic highs of 1980, many are becoming gun-shy on the yellow metal. While the continuing instability in the MENA region keeps oil prices high, increasing the CPI around the world, if tighter monetary policy and an economic recovery is realized any time soon, gold may be headed for a correction.