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Home > Blogs > Anthony Harrington > Gold – pausing, peaking or sliding? A (reverse) indicator for the fate of the West…

Gold – pausing, peaking or sliding? A (reverse) indicator for the fate of the West…

Gold market | Gold – pausing, peaking or sliding? A (reverse) indicator for the fate of the West… Anthony Harrington

A few weeks ago the price of gold touched $1380. Then, over the week of October 22 to October 28 the lustrous metal has been sliding backwards almost by the day, with a return to the high $1200s looking more and more possible. To be followed by what? The low $1200s? Or a zoom back to the high $1300s and beyond?

One of the truisms of the gold market is that it is an incredibly difficult market to time. It zigs when you expect it to zag, and visa versa. Even when it goes sideways, as it has for the last 24 hours, it tends to explore the highs and lows of whatever range the price is trapped within in a manner that is guaranteed to cost day traders their shirts. Go short, it goes long. Spot an up trend? It goes down. Want to bet on some interesting volatility? It goes flat enough to make comparisons with paint drying relevant. Under such circumstances, the hardened trader backs off and looks for the main trend - and that would be?

This is exactly the question that Julian Phillips, long term gold analyst and principal contributor to Goldforecaster, tackles in a recent excellently argued column. Taking as his starting point the latest G20 non meeting of minds, which confirmed national priorities over international ones, and signalled that currency wars are with us for the duration, Phillips asks if the future looks brighter.

The logic is simple. If you extrapolate from the present to the future and the line you trace points towards better international cooperation and solid growth, expect money to flow out of gold. If you expect things to get worse, the reverse is true. If you expect the world to continue to muddle along, getting neither better nor worse, then there is no clear direction for gold to go in, so go and do something else with your money. Or alternatively, you may as well leave a good chunk of it in gold since it is, after all, a recognised store of value (when it’s not losing value, that is…)

However, this is not an investment blog and what concerns us is not so much whether gold is going to rise or fall, but what the movement in the price of gold leads us to believe about the state of the world. Phillips suggests that we ask ourselves the following questions:

  • Has uncertainty and instability changed leaving us confident and certain of a stable future?
  • Have the nations agreed a sound, effective, currency system that caters for local national problems on the Balance of Payments front?
  • Have they agreed systems that effectively enforce this system, so that it is in national interests to subject themselves to that system?
  • Has the global economy in all its major parts returned to real growth where economic imbalances are removed?
  • Are we certain that the Sovereign Debt crises are over?
  • Do we expect the shift in world wealth and power to Asia to be smooth and trouble free?
  • Have the votes at the I.M.F. been changed to fully accommodate India and China's proportion of economic power or will the U.S. remain in charge irrespective of such changes?
  • Have central banks turned away from gold, confident and fully reliant on global currencies?

If you can answer yes to all of these then it’s time to sell your gold, he says. Of course, if you can answer yes to all of these then you probably need a) to be gently relieved of any responsibility for your future financial affairs and b) to be moved to a secure, quiet location where you can safely dream on without doing harm to yourself or others.

The absolutely key feature for Phillips as far as the price of gold is concerned, is that central banks, who but a short time ago were prepared to trust fiat currencies and were selling their gold by the boatload, have reversed their positions and are buying as much of the yellow metal as they can get their hands on. With central banks spooked and buying, price is no object and that has to be good news for gold bugs. For the rest of us, it’s a scary thought, since what it says about the future we are headed into is not good…

Further reading on global crises and the gold market:




Tags: central banks , currency systems , currency wars , G20 , global economy , gold , gold price
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