By Greg Holden
The dominant story regarding Gold is the bullish run we’ve experienced since the financial crisis of 2007-2008. More recent news shows a continuation of this trend, but how do we interpret the widening fluctuations in price over the past two months?
Starting July 28th the price of Gold began a sharp bull run that saw little to no retracement. On October 15th the price came down sharply, marking the first retracement since late-July, moving from $1385.15 to $1315.30 over a 7-day period. Ever since, we’ve seen the price of Gold move within a broadening range, but still bullish.
Three explanations have been circulating. The first argues that the approach of the holiday season brings wider price swings as currency values get boosted by increased retail sales and heightened travel among consumers. These price swings begin to compete with the rising price of Gold, creating broader movements.
The second takes the same approach, but downplays the holiday aspect. As winter months approach in the Northern Hemisphere, a natural increase in commodity prices (particularly Crude Oil and Natural Gas) occurs, which affects US dollar values, which in turn affects Gold. These first two explanations mirror each other rather well and there doesn’t seem to be any indication that they both can’t be right.
The third explanation has to do with end-of-year profit-taking and forecasting. The close of any calendar year brings forth article after article forecasting what will be in the new year, economically speaking. These forecasts bring with them portfolio adjustments by most traders, hedge funds, and investment firms which leads to the closure of existing positions, increased spending from year-end holiday bonuses, and a shift in exposure. As a result, we see wider fluctuations among prices as traders anticipate the unchanging yet so-called “forecast to change” market.
But what’s changed?
Gold prices are still moving up and forecasters are expecting them to continue unabated in 2011. Some estimates put the price near $1800 an ounce by this time next year. Without taking a stance as to the validity of these positions, one is reminded of the same attitude towards the housing market pre-2007.
Are we seeing the formation of a Gold Bubble?
No doubt long-term Gold traders made lucrative profits over the last two years. Such confidence building stability makes me suspect that their confidence in Gold won’t likely waver in the months ahead. But wasn’t that one of the many causes of our current economic situation: blind confidence in an asset which proves profitable time and time again?
After all is said and done, Gold still looks to continue rising in 2011. Traders may expect some downward retracements at the starting months of 2011 from a post-holiday/post-winter cooldown in spending combined with an eventual warming temperature. But overall, the adage “the trend is your friend” seems to apply.
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.