Wednesday, March 24, 2010

Is There Price Support for Gold at $1054?

Viresh Amin asks in an email:
I read on Casey Research daily dispatch article that the average price India paid for their gold purchase was 1054 and floor traders consider this a support level. If this information is true, do you still believe that gold could fall under 1000.

The short answer is "no." While belief that support at 1054 exists may bring in some buying, if you look at the one-year chart, it traded in the 1054 area for a very limited period of time. There's more support at 950, although it is possible that gold will break below that.

India's purchase has no influence on the technicals of the gold price. Technicals, or at least good technical analysis, is based on the observation,in the case of 'support' prices, that many traders trade based on the thinking of, "Hey, I bought here before and made money at that price. I think I will buy again."

The India purchase wasn't that type of purchase. The Indian government did not buy the gold, sell it, make a profit and is now sitting with boatloads of cash to re-buy it at 1054. The real trading at 1054 was only for a few days, thus there are very few traders in the position of saying, "Hey, I bought here before and made money. I think I will buy again."

I am tempted to say, only because of its poetic beauty, that the gold price will slice through 1054 as cleanly as Doug Casey slices through an Argentine steak. That said, I am not a day trader, and am really not concerned whether gold trades around 1054 for an hour or a month. For me, it is about the Fed not printing money which to me means that there is less money around (in the investment sector) to support gold at 1054, than when it originally climbed above that price.

1 comment:

  1. The price of Gold is a function of four things
    1) the price of oil: OLO
    2) the price of base metals: DBB
    3) the price of the US Dollar: UUP
    4) the yield spread on US Debt: TBT relative to PST as well as corporate debt.

    Gold has three strikes against it:
    1) the price of oil is going down ... today, oil prices, USO, declined 1.9% after data showed U.S. crude inventories rose nearly five times more than expected last week, a bearish sign for demand; and the world is going into a deflationary spiral, so there will be less demand.
    2) there will be less demand for base metals, as once again we are going into a global manufacturing decline.
    3) the US Dollar of all things could go from today's 81.90 to 82.5 and even 84; it is really a sick thing when the US Dollar goes up; but Milton Friedman called for floating currencies so now we have to accept the prospect of a higher dollar.

    But the saving grace for gold is going to be an explosion in the yield curve with prices inflating on the long end faster than on the short end; which is the reverse of what happened today in the bond market.

    And there is coming very, very soon, a rapid "liquidity evaporation" where people will not be able to get access to their funds at the brokerage or in the money market account. So gold is going to go ballistic.

    I encourage a purchase of gold coins, gold at BullionVault and in the gold ETF, GLD, in a trust account, not a brokerage account.