Gold market analysis

Though perhaps a stronger dollar, relatively at least, who has put yet another dent in the growth of gold and silver prices, final price hiatus may be short-lived yet.

Eurozone weakness revolving around doubts raised over Portuguese debt, coupled with some better economic pointers on the recovery in the U.S. economy led to dollar strength vs the Euro on Monday and, coupled with profit taking after last week's new high led to a sharpish fall in the gold price in dollars as a result.

Indeed gold is not alone in being adversely affected pricewise, silver and platinum group metals initially moved down even more steeply in percentage terms, while oil and base metals prices all also declined by greater or similar percentages. At one point gold fell back to around the $1412 level before making a recovery to around the $1420s in later trading. There was still some weakness apparent on Tuesday morning overnight Asia and in early European trade, which again has largely been down to some slightly nervy profit taking, by less firm holders of precious metals taking a positive view on growth in the U.S. and the global economies.

But recent history shows that such temporary, mainly currency-related readjustments are unlikely to continue and that precious metals prices are more likely to consolidate again and then continue their upwards paths. Economic progress seldom stays unchecked and there are still a sufficient number of doubts about the state of the U.S. economy and the onset of price inflation there that any dollar recovery may be shortlived and, likewis,e falls in hard commodity prices in dollar terms may quickly be reversed. How long the current correction will last, and how far it could take prices down before a recovery, remains to be seen.

Gold and silver may also have been affected adversely in some Asian markets by comments attributed to the Chinese Central Bank suggesting that gold, in particular, may be nearing its peak. Such Chinese pronouncements seldom seem to be made without some ulterior motive behind them and a precious metals price hiatus may suit the Middle Kingdom as it continues in some efforts to reduce its heavy dollar weighting in its monetary reserves. Lower metals prices in general may also suit the Chinese as global prices have been very much supported by the country's seemingly insatiable appetite to feed both investors and its manufacturing industry. Higher input prices mean higher costs of Chinese products in global markets which could reduce sales and income in still cash-strapped economies as well as higher inflation locally.

Some analysts see the move in precious and base metals prices as a necessary correction, but it is interesting that the current gold price level as I write of $1415 is viewed by some of gold's detractors as being the beginning of the end of the gold bull market, yet it has only fallen just over 2% from its peak and is far above what was seen as its likely top of $1000 only a little over a year ago. Others now see $1400 as a likely gold price bottom, although a serious correction could take it down to well below there - but still without interrupting the overall bull market trend.

Things have indeed changed though in the perception of global economic recovery since the depths of only two and a half years ago and certainly there are positive signs in the U.S. at least, although some Eurozone nations appear to remain teetering on the brink with a reluctance of populations, not unnaturally, to accept the strong economic medicine being dished out by governments, the ECB and the IMF. And who can blame them? It's not their fault that their countries' economies are in a mess - except perhaps for in believing politicians promises of unending growth and voting them in to continue with their over-profligate borrowing and spending policies!

But even though the U.S. economy does appear to be picking up, all is not rosy debt-wise there either. States and Municipalities are still mired in huge debts and it is unlikely all can be bailed out. There will be defaults and bankruptcies which will dent public perception of the recovery and impact adversely any recovery in employment for some time yet to come.

The ongoing increases of unbacked money supply to stimulate growth also have to have an ongoing impact and will result, if they have not already, in ever-rising inflation. At some stage the realisation that prices are rising, unemployment is not falling significantly and wages are not increasing to counter the inflationary trend, will sink in and perhaps hit the stock market hard and drive waverers back into gold and silver yet again. And so the cycle continues!

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