Complex Made Simple

Has the gold price already passed its bottom?

Gold has been in a correction phase since hitting $1,030 per ounce back in March, a new all-time high. A US dollar rally and profit taking sent the gold price back below $850. But bullion analysts are already beginning to think that this marked the bottom of this correction. If so gold will likely rejoin oil to test the boundaries of this bull market: $1,200 an ounce this autumn?

Gold bugs had their 15-minutes of glory this March when the yellow metal passed the $1,000 an ounce mark for the first time. But they have had to live with a sharp retracement since then, and late buyers have taken a hit.

This fall from grace might well prove short lived. Technical analysts say that when gold touched a whisker below $850 the bounce was so sharp it probably marked the bottom of the correction, still some way off the 200-day moving average price of $820 an ounce but perhaps as close as gold is going to come to this price.

After all, gold has a 90% correlation to the oil price and black gold has stormed ahead to $126 a barrel recently. Yellow gold could be expected to follow.

Dollar bounce

The real devil for the gold price has been the resurgent US dollar which has climbed back from the depths of $1.60 to the euro to around $1.54, still nothing to write home about and well down on $1.40 when the sub-prime crisis hit last summer. However, gold moves in an inverse relationship to the US dollar so when the greenback goes up the yellow metal falls in price.

The problem for Uncle Sam is that the combined efforts of Wall Street and Washington to talk up the US dollar, backed by a few less frightening than expected statistics, probably do not make for a sustained dollar rally. There are more write-downs in the air this week, suggesting the financial crisis may be far from over.

Indeed, the truth is that the only way for the US economy to deal with the financial crisis is to devalue its way out, raising exports and curbing imports. The alternative would be belt-tightening monetary policy that would literally bankrupt the banking system and many individuals. No, inflation is the way forward.

Inflation, inflation

That will be suicidal for the US dollar, whose fall to $2 per euro cannot be long away. But this is great news for gold investors, and anybody who is thinking about buying gold or silver should get on with it.

Certainly by this autumn, and probably sooner, the investment community is going to start to ask where is the promised recovery. It will become apparent that full-year profits at both financial and non-financial companies in the US are going to disappoint, and the onset of inflation courtesy of lax monetary policy from the Fed will be only too apparent.

In this end-game the industrial and agricultural commodity boom is likely to subside as a period of low, no or negative economic growth becomes obvious. And then only one investment is likely to shine, that safe haven and defender from inflation: gold. $1,200 an ounce this autumn looks eminently achievable in the circumstances.