Veritas: gold price in the doldrums

The fundamentals suggest the price of gold could continue its inexorable rise, but investors are nervous about a bubble.

The fundamentals driving the gold price upwards all of a sudden have a question mark hanging over them. Yet, its status as a safe haven in times of trouble, of which we have aplenty, seems solid: the threat of a double-dip recession affecting the global economy; the Eurozone sovereign debt crisis; the downgrading of US sovereign debt, with the possibility of yet more quantitative easing to come; and an unpleasant combination of low growth, low interest rates and looming inflation. Add to that the booming commodities sector, and gold bugs have every reason to be happy.

So why the sell off? The trigger was the announcement by the Chicago Mercantile Exchange that margin requirements would be increased by 26%, which make gold more expensive to hold. The margin hike played on fears lurking at the back of investors’ minds that gold’s surge in the price is just too good to last, so many decided to take profits. An extra nudge in this direction was that the sense of panic coursing through the markets last month seems to have subsided.

All of which does not mean that there are not more nasty surprises awaiting us round the corner, to send the price of gold heading back up again. As one commentator said, gold is a bit like the mercury in the global economy’s thermometer; the higher the fever, the higher the price of gold. And nobody believes we are out of the woods yet.

The sell off has been followed by a period of inaction. The markets were waiting for Ben Bernanke’s speech at Jackson Hole today, for clues about the future direction of events. If he went for QE3, the reasoning went, gold would resume its climb; if he adopted a more neutral stance, gold would tumble. In the event, he delayed the decision to the next policy meeting of the FOMC on 20th September, granting an extra day for a ‘fuller discussion’.

The gold debate continues. 

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