Gold’s biggest influence, fear or greed?

In the world of quantum physics, it is accepted that a cat can both be dead and alive at the same time. The cat example has been used to illustrate the condition in quantum mechanics of which an item can be shown to be in two difference states at the same time. In gold we are consistently trying to define the market as reacting to one factor or another.

The two “states” of the gold market that are battling for attention at the moment are fear, which embodied the safe haven role that gold has traditionally fallen under, and greed, which is the rush for cash or profit-taking that has been observed as one of the main reasons for the retracement from the highs seen in August.

We tend to fall under the trap (much like the traditional view that people took in physics) in which the factors that influence the price are binary (as in it is either one or the other, 1 or 0). What I currently see being developed is a market in balance for the short-term, being both a safe haven and a way to free up cash for those weak longs in the market and in-effect cancelling each other out (being both dead and alive at the same time).

What this means for the gold price should be a almost deadly dance of profit taking verses buying on the dips, with strong buying demand from India this month and the CAT-astrophic economic news coming out of Europe almost every day. We should see a relatively stable gold price for the short term, with resistance of the 25-day moving-average at $1,680 and the psychological level of $1,700 being the key price points to look out for, and support around the $1,615 level.

Unlike physics however, gold is determined by the human factor, which is an unstable beast at the best of times, and it won't take much to tip the scales to destroy its current delicate balance. More economical turmoil can tip gold in almost any direction, but as seen lately, the gold market will probably act negatively towards it at first to free up cash, before its traditional safe haven role kicks in.

Volatility will be the keyword once the peace is broken, let’s just hope most of us are not cut short taking a cat nap when it happens (unless of course, you are Schrödinger's cat).

Austin Kiddle is an analyst at the London-based gold broker Sharps Pixley Ltd.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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