Gold - back from the brink?
Lawrence Williams

The gold price took quite a dive and lost all the ground it had gained after last week's sharp rise. The change in sentiment may mean a slowing of the advance, but the gold price trend still looks to be upwards.

In an article a couple of weeks ago, I warned that any signs of dollar strength could lead to a setback in the rise in the gold price, but when it happened it was much steeper than I would have anticipated. I also warned of increased volatility as prices rise. That has certainly been seen in the markets.

Yesterday gold tanked - right back down to $790, before recovering overnight up to the lowish $800s again so far this morning. It remains to be seen where it goes from here, but my view is that it will regain some, if not all, of its lost ground and head back up to the $850 mark, but it may take a little time.

Has anything fundamental changed? The answer perhaps is sentiment has changed and investors may be a little more nervous about the path of the price. Volatility will remain, but overall the main fundamental driving the gold price upwards - dollar weakness - remains despite the occasional shortlived recovery.

But, investors in gold will likely be more cautious again. The price rises up to over $840 were accompanied by a general euphoria among gold believers that the long awaited break-out towards the $1,000 level was not only likely, but imminent and once the price started to move this feeling spread, before more caution set in. Once the price had seemingly settled around the $830 mark, the potential for a downward move if economic indicators for the US economy and the US deficit improved was there and with better figures coming out at the end of the week, coupled with a rise in the value of the dollar against other major currencies, the market was primed for a fall. And when it came it was as fast and as deep as the previous rally had been quick and strong. Back to square one.

There probably has been another change in sentiment, though, that may make the continuing upwards path of gold - and I believe the price WILL continue to rise - a little less steep for the time being. And that is the strong recognition by those countries whose currencies have risen fastest against the dollar, that the latter's weakness is beginning to impact seriously on their own economies and any dollar fall from now on is likely to be a little more muted.

Central Banks always have tried to control currency movements - and perhaps, as GATA would have it, the price of gold too. That is not illogical if one considers gold a currency - and also an indicator of the strength or otherwise of the dollar. Controlling gold price rises in effect can be seen as an attempt to control a dollar decline.
What other sentiments or fundamentals have changed? Not much. The report that the Chinese may switch some of their huge foreign exchange reserves away from the dollar is hardly surprising. If this was switched into gold it would have a huge impact on the market, but there is no real indicator that this is part of the plan.

The Gulf States look like they may be unlinking currencies from the dollar, but again this may have little impact on the dollar itself.

But overall the dollar remains weak and if it continues to fall - perhaps at a slightly slower rate than over the past few weeks, dollar priced commodities will continue to rise in price - notably gold and oil.

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