What is gold’s next target?

The U.S. Comex Gold futures dropped $1.40 this week to settle at $1,768.70 on Tuesday after reacting positively to the Fed's QE3 announcement last week and taking off from the $1,600 level in mid-August. Having surged 4.21% and 6.30% respectively in the past two weeks, the S&P 500 Index and the euro Stoxx 50 Index retreated 0.44% and 1.59% this week. The Crude Oil futures were volatile — having broken through $100 on Sept. 14, the Crude Oil futures dropped to $95.29 on Tuesday.

While the Fed launched QE3 and will purchase a total of $85 billion in Treasury securities (from the Operation Twist) and mortgage-backed securities (from the QE3) per month for the rest of the year, Charles Evans, the President of the Federal Reserve Bank of Chicago predicted that these purchases will continue into 2013 to help push down the unemployment rate to 7%, even with inflation ticking beyond 2%. The U.S. added only 96,000 jobs and saw industrial production plunged 1.2% month-on-month in August. China's August year-on-year industrial production dropped below 9%, the lowest growth since May 2009. The Eurozone industrial production contracted for the eighth month in July. Strategists around the world warned that even with the global central banks easing monetary policy, economic growth is still pretty vulnerable unless the European structural growth problems and the U.S. fiscal cliff are resolved.

On the commodities side, the U.S. CFTC data showed that as of the week ending Sept. 11, traders increased their net long bets on the 18 commodities futures and options to a four-month high because of expectations of monetary stimulus in the world. Net positions in gold by managed money went to a six-month high at 165,724 contracts. Bloomberg data also shows that gold exchange-traded product (ETP) holdings have risen to an all-time high of 2,534.80 tons while platinum ETP holdings have surged because of the labor unrest in South Africa.

The natural question to ask is when will gold price breach the year-ago record high of $1,920? While no one can predict the timing, we do know that gold price has typically followed a consolidation pattern before breaking new highs and is firmly supported at $1,520. Central banks, especially in the emerging countries, are diversifying into gold continuously while the European central banks sold only 5.9 metric tons of gold in 2012 compared to 157 tons in 2009. China and India, the biggest gold consumers in the world continue to view gold as a good investment and inflation hedge.

About the Author
Austin Kiddle

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

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