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Gold Price - Temporary Lapse?
Is the recent decline in the price of gold a temporary lapse or a harbinger of a longer-term trend?
Gold prices fell 1.1% in January 2010 as a stronger U.S. dollar curbed demand for the metal that has long been seen as an alternative investment, particularly in times of stress.
The U.S. dollar's rise is mainly attributable to a recent report showing that the U.S. economy grew 5.7% in the last quarter of 2009. We now could be at a cross-roads: has the demand for gold stalled?
Gold futures, in fact, have fallen to US$1,067 for February delivery and are priced at US$1,058 one year hence, as against the gold price at the February 6 close of US$1,066, the lowest it has been in three months.
Short-term, we expect the U.S. dollar will continue to rise, particularly as the euro continues to weaken. The Greek tragedy unfolding could put enormous pressure on other European nations supporting large deficit possibilities. If so, gold could be caught in a conundrum. If the U.S. dollar is considered the only safe haven, gold is likely to tank. If support at US$900 does not hold, the price could test the October 2008 lows just north of US$750.
Longer term, President Barak Obama's State of the Union speech on January 27, with its message of continued spending and a focus on health care and climate change, rather than on jobs and the economy, could pressure the U.S. dollar later in 2010. Should the Democrats lose seats in large numbers in the Congressional elections next November, gold prices should recover and move higher as the U.S. dollar declines.
In 2009, the gold price gained 24% as the Federal Reserve's policy of low interest rates continued and added to the downward pressure on the U.S. dollar. For 2010, the price of gold may well depend upon the American administration's response to appeals for fiscal restraint and deficit reduction.
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