Gold: Sound & Fury… But What’s It All Mean?

Gold-price volatility so far this year has been a reflection of short-term speculative activity by a relatively small group of hedge-funds and other institutional traders taking relatively large positions in “paper”

markets.

In paper markets, no physical gold actually changes hands.  Instead, trading of futures and forward contracts, as well as IOUs between large dealers and traders, governs much of the short-term day-to-day (and even more so much of the intraday) price fluctuations.

Meanwhile, “physical" demand continues to grow over time — with buying from the gold-friendly Asian markets and from a number of central banks continuing apace.  While total global physical demand may be up in one quarter and down in the next, its long-term trend continues inexorably higher thanks to rising personal incomes and growing middle classes in China, India, and elsewhere in the region.

However, it is important to remember, much of the recent "sound and fury” signifies little with respect to the long-term multi-year outlook for the yellow metal.

So far this year, despite its recent losses, gold could continue to outshine returns on U.S. and global stock markets.  If gold’s relative strength vis-a-vis equities continues in the weeks and months ahead, fund managers will begin shedding equity holdings for both “paper” gold and some (i.e. central banks as well as retail investors) will go for the real thing, “physical” bullion.

Indeed, in recent weeks, we have seen sizable growth in gold ETF holdings presumably by a few hedge funds restoring positions taken up prior to the September 2011 all-time gold-price high. This could be a sign of things to come.

This year’s gold-price volatility — both up and down — has largely been a reflection of speculative activity triggered by a series of market developments:

•             First, the uncoupling of the Swiss franc from its peg with the euro and its subsequent sharp appreciation against virtually all currencies — including even the U.S. dollar and Chinese yuan, produced a sharp rally in gold.

•             Next, fueling more bullishness for gold, came the announcement of Quantitative Easing (QE) by the European Central Bank, following in the Fed’s footsteps, raising anxiety among traders over how this would “pan out” for the European experiment with a single currency — and its ultimate inflationary consequences.

•             This was followed by rather hawkish news from the Federal Reserve, raising expectations of an early rise in interest rates — and sending gold prices sharply lower.

•             Finally, this past Friday’s news that economic growth in the last quarter of 2014 (as indicated by the downward revision in U.S. Gross Domestic Product for the fourth quarter) was lower than financial markets heretofore believed sent gold prices quickly higher, while Wall Street took a bath.

Most gold analysts at the major banks and brokerage firms, along with much of the financial press, expect the metal’s price will likely average somewhere in the $1100 to $1200 range with a possible low near $1180.

I’m considerably much more bullish than the consensus: Stock market volatility, especially on the downside, attracts bullish long-term gold investors and short-term speculators . . . and this could very well be the fuel that sends gold much higher this year and beyond.

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Courtesy of www.roslandcapital.com