Gold Price Factors

At a time when you would expect gold prices to climb even higher, the shiny metal I call mankind’s inherent currency has dropped along with other asset classes. I’m sure you’ve wondered why, and I believe I’ve got some understanding of the complex forces that are driving gold prices today. These forces have helped to stabilize gold and even quelled the heat around the commodity recently. These latest weeks’ trading have helped us to understand the dynamics of the commodity all the better. Thus, I suspect I can add value to your forecasting.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Gold Price Factors

Gold prices dropped again to start this week, despite a swirling storm about the euro and new concerns about a possible U.S. government budget failure. You would expect gold prices to rise in such a scenario, but the metal was instead down roughly $30 Monday. The spot price of gold was flirting with sub-$1600 per ounce in fact, certainly surprising given the last several weeks of chaos. So what’s up?

Some might point to a previously overextended commodity price now seeking mean valuation, or reverting to its mean. This is certainly the most important factor in forecasting gold price movement, since the market only seeks to estimate true value. To understand how a mean reversion could be underway, we must review recent history briefly.

Gold topped out at about $1890 on the spot price (closing pricing), spurred by a frenzied drive to acquire the metal as the US appeared set to record a technical default on its debt this past summer. A quick study of the one-year chart for spot gold clearly illustrates an insecure price level near $1900, established by the spike in the commodity. Once the US Congress mitigated technical default risk, and while the United States even bore a downgrade of its sovereign credit rating by Standard & Poor’s (NYSE: MHP), investors looked around and saw all was not lost. Suddenly the gold price felt expensive, and so this medium term driver is certainly playing a major role in gold price action today. However, a look at the chart seems to show gold at about a medium term trend line, and a $1500 price would seem a secure floor despite its breaking of that line.

Something else is playing a short-term role in driving gold today though. Popular media, based on analyst interviews, regularly reports that there is a force against gold which is capital driven. This force is the theoretical use of gold-relative profits or positions to cover other positions as asset classes dive. It may likewise be that an unbalanced holding of gold in many portfolios is being balanced with capital seeking value in other segments. But, the drops seen in other investment securities pricing does not support this second idea as a main factor in markets.

Another important factor working against gold and all commodities is dollar strength. This has certainly been a stabilizing control on gold pricing. As the euro has found fewer friends while rumors swirl about an imminent Greek default, the dollar has benefited. As commodities are priced in dollars, the strength of the currency has made commodities cheaper in dollar terms. The funny thing is that as the global economy comes under stress, dollar strength has persevered, and this has certainly acted as a counterintuitive and counteracting force on gold pricing.

Over the longer term though, if the United States continues to find intensifying economic and investment pressures, the dollar could be eventually undermined, at which time gold would be free to fly to greater heights. This untethered scenario is the kind that supports gold pricing above $2000 and perhaps as high as $5000 per ounce. Without it though, I cannot find supporting reasoning to forecast new records for the price of gold.

This article should interest investors in precious metals stocks: Goldcorp (NYSE: GG), Agnico-Eagle Mines (NYSE: AEM), Allied Nevada Gold (AMEX: ANV), AngloGold Ashanti (NYSE: AU), AuRico Gold (NYSE: AUQ), Aurizon Mines (AMEX: AZK), Barrick Gold (NYSE: ABX), Brigus Gold (AMEX: BRD), Charles & Covard (Nasdaq: CTHR), Claude Resources (AMEX: CGR), Commerce Group (OTC: CGCO.PK), Compania Mina Buenaventura S.A. (NYSE: BVN), DRDGOLD (Nasdaq: DROOY), Eldorado Gold (NYSE: EGO), Entrée Gold (AMEX: EGI), Exeter Resource (AMEX: XRA), Gold Fields (NYSE: GFI), Gold Reserve (AMEX: GRZ), Gold Resource (Nasdaq: GORO), Golden Eagle Int’l (OTC: MYNG.PK), Golden Star Resources (AMEX: GSS), Great Basin Gold (AMEX: GBG), Harmony Gold (NYSE: HMY), IAMGOLD (NYSE: IAG), International Tower Hill Mines (AMEX: THM), Jaguar Mining (NYSE: JAG), Keegan Resources (AMEX: KGN), Kimber Resources (AMEX: KBX), Kingold Jewelry (Nasdaq: KGJI), Kinross Gold (NYSE: KGC), Midway Gold (AMEX: MDW), Minco Gold (AMEX: MGH), Nevsun Resources (AMEX: NSU), New Jersey Mining (OTC: NJMC.PK), Newmont Mining (NYSE: NEM), North Bay Resources (OTC: NBRI.OB), Northgate Minerals (AMEX: NXG), NovaGold Resources (AMEX: NG), Richmont Mines (AMEX: RIC), Royal Gold (Nasdaq: RGLD), Rubicon Minerals (AMEX: RBY), Seabridge Gold (AMEX: SA), Solitario Exploration and Royalty (AMEX: XPL), Tanzanian Royalty Exploration (AMEX: TRE), Thunder Mountain Gold (OTC: THMG.OB), U.S. Gold (NYSE: UXG), Vista Gold (AMEX: VGZ), Wits Basin Precious Metals (OTC: WITM.PK), Yamana Gold (NYSE: AUY), Coeur d’Alene Mines (NYSE: CDE), Endeavour Silver (NYSE: EXK), Hecla Mining (NYSE: HL), Mag Silver (AMEX: MVG), Mines Management (AMEX: MGN), Silver Standard Resources (Nasdaq: SSRI), Silver Wheaton (NYSE: SLW), SPDR Gold Trust (NYSEArca: GLD), Market Vectors Gold Miners ETF (NYSEArca: GDX), iShares Silver Trust (NYSEArca: SLV), ProShares Ultra Silver (NYSEArca: AGQ), ProShares Ultra Short Silver (NYSEArca: ZSL), Great Panther Silver (AMEX: GPL), Silvercorp Metals (NYSE: SVM), Paramount Gold and Silver (AMEX: PZG), Pan American Silver (Nasdaq: PAAS) and First Majestic Silver (NYSE: AG).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.