By Russell Glaser
As the year comes to an end, spot gold prices are down the past two weeks as traders and institutional investors take profit on long positions in the commodity that has appreciated over 25% this year alone.
Over the past two weeks the price of gold has fallen from an all-time high of $1431.00 to $1371.05, for a decline of almost $60 or 4.1%.
The declines may be worrisome to traders as a two week decline in the price of gold may have pushed many short term traders out of the market. However, long term instructional traders may be in a better position to absorb a 4% decline in the price as the price declines barely put a dent in the uptrend when looking at the longer time frames such as the weekly and monthly charts.
Can the recent declines in the price of spot gold be attributed to end of year profit taking on a commodity that is up 26% the year?
Looking back, it is not surprising the rise in the price of spot gold. What is surprising is the extent of the gains. An environment with ultra-low interest rates may have sparked long term inflation fears, driving traders into what George Soros called, “The ultimate asset bubble.”
Despite repeated calls for declines in the price of spot gold that did not occur from analysts, economists, and traders alike, what conditions would make for an environment suitable to falling gold prices?
It is fair to assume that this asset bubble may pop when global interest rates begin to rise and inflation expectations are subdued.
However, when looking at the monetary policy of the larger developed economies; the US continues to employ loose monetary policy with just last month announcing measures to increase liquidity with a second quantitative easing program. The ECB would like to raise interest rates but doing so could drive the European fiscal crisis deeper in some financially troubled countries. Japan is fighting deflation and is in no position to raise rates.
China on the other hand has begun tightening monetary policy. This could be the first sign that the global economy is beginning to make a change in its stance on inflation which could influence global inflation expectations.
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
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