5 factors governing the future of gold

Just as Barry has his Fanilows, and Justin has his Beliebers, gold has its very own obsessive fans.

And, like all good, zealous fans, Goldbugs have an impressive degree of loyalty. The same people who told me to ignore the fundamentals and that I couldn’t argue with a trend back in 2011, are telling me to ignore the trend and believe in the intrinsic value now.

And there’s no doubt that the trend on the chart above is looking decidedly bearish.

So, if the goldbugs are insisting that the intrinsic value is still high, what’s gone so wrong for gold recently?

• First off, gold is seen as the investment to take against uncertainty in the global economy. But now, we’re seeing central banks cutting interest rates, which pushes stock prices higher and encourage economic growth. This floods investment money into the equities markets – and out of gold.

Add to this the positive economic data and employment figures from the US, and we’re seeing the indices climb to record highs – while gold drops back.

But that’s only part of the story. The huge sell-off last month began all number of theories …

• We have Cyprus having to sell its gold to pay off its bailout which is blamed for starting the panic. However, its entire holdings are only worth $750million – pretty small change in the global gold market. Can little-old Cyprus really affect global gold prices that much?

• Next up, we have a conspiracy theory that the gold slump was orchestrated by Central Banks, who are battling out the currency wars. Here’s what economist John Mauldin said last month,

“Five hundred tons of paper gold contracts were sold dumped into the market on Friday. That is a lot of gold. In short, some people sold gold like they had a gun to their heads, in such a quantity and with such ferocity that the likelihood of their being a for-profit seller is right up there with my chances of winning this week’s Masters.”

• Or was all the fuss caused by a big hedge-fund burying enormous secret losses?

Part of the confusion is caused by the two pressures driving the price of gold: physical buyers who want gold bars or jewellery for long-term investment; and paper buyers who buy through ETFs or futures for shorter-term investments.

The recent sell-off has been driven by ETF sales. And it’s been followed by some serious buying from physical goldbugs, hoping to snap up gold at bargain prices.

The bears are saying, “Look, the big funds are pulling out of gold – the gold bull run must be over.”

The bulls are saying, “But physical gold is still in demand – there’s a shortage of gold bars – so the price will recover.”

So, who’s right?

The bizarre events in the gold market over the past month have proved one thing without a doubt – the gold market is highly complex and frustratingly opaque.

But as traders, we have the ideal refuge when the markets just don’t make any sense …

… charts.

Looking a little closer at the downtrend on gold since September 2011, there’s plenty of scope for the price of gold to correct upwards, without breaking the long-term trend line.

However, the price is currently struggling to break above resistance as 1480, which suggests that there’s little let-off in selling pressure. If the price manages to breach the 1500 level, then we may see a more substantial recovery; but if the breakout of this consolidation is to the downside, it’ll look to be confirming the downtrend.

My advice is to forget what you “think” about the gold price … or what economists and speculators are telling you …

Look at the chart.

Examine the chart on a timeframe that suits your trading perspective. And on a longer timeframe that’ll give you a bigger picture. And, just as importantly, be aware of the huge volatility in this market.

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