How low can gold prices fall? While sentiment is still negative and the yellow metal’s technical position has eroded, fundamentals suggest that the current decline won’t last much longer. The reason my previous comments on gold have sometimes been less than enthusiastic is that jewelry demand, a key factor, fell by nearly a third during the first half of this year. Why? Simply because gold prices were too high. Another thing that worried me: while jewelry demand sagged, gold kept being pushed up by producers (especially Barrick Gold), who bought back forward sales commitments. Most commentators praised such action, as I do—but they missed the fact that “de-hedging” by producers on such a large scale could not continue. So why do I think gold is now nearing an important bottom and will soon stage a meaningful rebound? First, because the metal has fallen sufficiently to give jewelry demand a fresh boost. Second, global mine output is falling. And third, the period of steadily rising interest rates appears over. Where do I think gold will bottom? Looking at the charts, the $550/580 range seems ideal for building a base. The Midas metals will take a while to consolidate at these levels, but I wouldn’t be surprised to see the $650 area tested again by early next year.
Peter Cavelti’s background as a financial analyst and author spans 35 years and four continents. His grasp of global issues is extraordinary and his comments and books have been published internationally. He was president of Canada’s Guardian Trust and subsequently owned his own firm, which managed some of the best-performing natural resource mutual funds. Peter firmly believes that only an integrated understanding of geopolitical, demographic and economic events can lead to successful investing, and that is what his web service Perspectives is about. If you feel keeping on top of relevant global events takes too much time, Perspectives is for you. Whether it’s investment advice or political analysis, Peter offers his insights in concise and easy-to-read form. Best of all, Perspectives is free. Visit www.cavelti.com and sign up today!