March 23, 2008
Eastern demand for gold from the jewellery sector seems to have returned in a big way after some strong resistance to the high gold price seen earlier this month and this could suggest the current sharp reversal may have reached its nadir.
One of the elements which observers have used to express caution over the rise in gold prices over the past month seems to have reversed in the past week as the metal price fell around 10 percent from its plus $1,000 highs in only a matter of days.
Reports from Asia in particular suggest that jewellery sector buyers and investors have been climbing back into the market for the yellow metal in a big way in the past few days after virtually boycotting it in the run up to the recent higher price levels. The jewellery market tends to be pretty shrewd in its assessment of price levels, and this activity suggests an underpinning of the gold price at or around current levels and further suggests, perhaps, that the upward momentum will come back into effect before too long.
The Eastern jewellery sector, making its living by day to day trade in precious metals far more so than its Western counterparts because mark-up margins are far lower, tends to be a strong bellwether as to where the price is going. The past week, once gold came off its highs, has seen reports of a huge upsurge in buying in countries like India, China, Vietnam and Thailand. Indeed some observers have described the rush back into gold as unprecedented.
Sell on strength, buy on weakness has always been the investor’s adage, and is obviously a wise principle, but picking the tops and bottoms is far from easy. Guidance from those who make their basic living from the marginal costs of gold could thus be good advice. But this more basic demand will be being heavily affected by profit taking within the Western institutional sector, with many funds needing to enhance their own basic liquidity. Whether this will have yet run its course will be another factor affecting the market.
Indications too that investment demand has shot up in the past few days has also been strong, but with Western markets mostly closed for the longish Easter break, it is a little difficult to judge price movement trends. However, what we have seen is that the gold price has stabilised in the low $900s and is beginning to creep back up again, driven by the return in demand from the East. It will be interesting to see what happens when Eastern markets open again next week as these will likely indicate whether there may be a quick bounce back towards the $1,000 level, or whether there will be a sustained period in the low $900s, or even a further fall.
There is still no doubt that the majority of specialist gold market observers are looking for a return to higher prices over the next few weeks as gold price fundamentals remain exceedingly strong as Central Banks and institutions battle to counter the effects of the ever continuing global financial crisis. Much will likely depend on institutional liquidity, but the big climb back into the market from the jewellery sector should ensure that demand remains strong, at least at current prices, and the downside risk is thus more limited.
Whether we will see $1,000 gold again in the next few months once the Eastern wedding season is over and demand is traditionally more limited remains to be seen, but prices could be set for a good surge again later in the year, particularly if the dollar remains weak. Indeed continuing dollar weakness will likely underpin the gold price in the short term at least. There will also likely be some nervousness in the market again should the psychological $1,000 price be neared or breached again given what has just happened price-wise.
But, should the dollar strengthen and the US avoid a real recession, the really big upsides looked for by some gold followers may yet be further away than they would hope and predict.
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