We would not be surprised to see some temporary short term weakness in gold prices as the market absorbs the less-than-spectacular impact of the long term US debt downgrade. No better representation of that thinking is available other than the relief rally in the equity markets and a bounce in the US dollar, which is taking some of the shine off gold for now.
Gold is currently trading at $1,739, down more than 4% from its recent peak. Some technical analysts suggest that gold will retrace to $1,680, or possibly the $1,630 level, but fundamentally and in the longer-term the positive story for gold is largely unchanged.
It will be interesting to see just how much support gold receives from the Asian physical markets in the face of good selling — from India in particular. It is not untypical to see gold buying emerge from India when gold looks cheap, just as Chinese buyers tend to pick the market on the way up and at much the same price point — the Indians being bargain hunters and the Chinese being trend-followers. From a P&L perspective, it’s much the same thing — with just a timing difference between them.
On the charts, gold looks a little overbought and a consolidation or even retracement would be constructive in advance of moves higher — and indeed this would make later higher moves more sustainable in the final quarter of the year, typically gold’s strongest.
By the fourth quarter it is likely that pressure will again be back on political leaders to find a cogent and sustainable plan for debt relief while maintaining some semblance of economic growth and stability in the jobs market... we have been here before haven't we? If you think something is coming through, then you may do well to abandon gold soon. If, on the other hand, you believe that politicians on both sides of the Atlantic will fudge the answers and have no real solutions to their debt crises other than QE — then you should stay long gold.
Today marks the 40th anniversary of the end of the Bretton Woods Agreement, which fixed convertibility between the dollar and gold and began 40 years of fiat currencies. Never has it been more appropriate to have the subject of the world's single reserve currency on the agenda — a seminal time when the dollar appears to be ending its viability in that role.
Ross Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.