Today’s Fusionomics report on Gold:
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Gold jumped to above $1039 on dollar weakness, a Bank of America supportive report and strong Indian jeweller demand. That’s above the previous record intra-day high of $1034, hit on 17th March 2008. Indeed, factors that could still drive the gold price higher:
1. An increase in inflation fears, which have played only a small part in the rally so far.
2. A creeping loss of confidence in paper currencies and the US dollar.
3. The psychology of the market. The headlines that gold is setting new record highs in nominal terms will inevitably draw attention to the fact that gold is still trading well below the all-time high of around $2,300 in real (inflation-adjusted) terms, which was seen briefly in 1980. This will encourage talk of the potential for further explosive price gains.
The upshot is that don’t be surprised to see gold break still higher in the coming weeks. However, a mix of unfounded inflation fears, conspiracy theories and speculative demand looks more like the ingredients for a speculative bubble than the grounds for a sustainable increase in prices. Recall that after peaking at around $850 on 18th January 1980, gold quickly slumped to $650 by the end of January and below $500 again by April. While consolidation will likely occur, key support levels at these breakout points may hold leading to gradual higher gold prices over the intermediate/long term. The focal point of such a scenario would be pinned on the US Dollar.
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