Gold Prices: Bull Market or Fool's Gold?

Joel Anderson  |

The price of gold has been bullish so far in 2012, jumping almost 11 percent so far this year. Thursday was consistent with these rising prices, with the price jumping almost 0.75 percent and pushing the commodity past its eight-week high to over $1,755 an ounce on the third straight day of rising prices. What does this mean for the price of gold going forward? Depending on who you ask, it's either going to rise or fall in price.

January's Gains Temporary?

The current jump in gold prices could represent a rebound from the crash that occurred late last year. Prices reached nearly $1,900 an ounce in mid-August of last year only to crash hard in late September, rallied to close to $1,800 in early November, and then plummeted again, finishing the year at less than $1,550 an ounce.

The debt crisis in Europe and potential collapse or devaluation of the euro had driven investors towards gold, driving up the prices. However, sunnier news from Europe and the resulting increase in investors' appetite for more risk could contribute to a tumble in gold, similar to what drove prices down during the tail-end of 2011.

Now, January has been a solid month for gold bugs as the price has continued to climb since the start to the year. Driving the price jumps could be a combination of concerns over the ongoing talks over Greek debt and an uptick in new unemployment claims. However, the price could fall again if tomorrow's new jobs data is as strong as many expect it to be, offering up yet another chapter in the roller-coaster ride that gold's been on since last summer. Still, several experts predict that January's gains represent a temporary correction that most likely won't continue in the long term.

“There’s nothing new to push prices above the record levels we saw last year,” said Rohit Savant, an analyst with CPM Group in New York.  Savant, who pointed out that a relatively strong dollar will push down gold prices, also said that he felt gold is “looking a little overbought.”

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Or is a Bullish Month for Gold Starting a Bullish Year?

However, some seem to believe that positive economic news from America will drive the commodity higher. Economic growth will most likely stem from an government stimulus programs and inflation, which should in turn drive investors to gold and away from the dollar. “When economic news comes in better than expected, it boosts commodities, including gold,” said Scott Gardner, the chief investment officer at Verdmont Capital SA in Panama in an e-mail to Bloomberg. Gardner also believed that as "deflationary concerns subside" it would help push up gold prices.

Lower Risk Aversion Driving Prices?

Of course, still others seem to believe that investors see the dollar as a safer investment and, with improving economic conditions, less risk-averse investors are returning to a gold market that was volatile last year due to the stabilizing markets. "Gold's fundamentals are strong and the recent rebound in risk appetite has encouraged investors to come back to the market or add to their existing positions," said Anne-Laure Tremblay, an analyst at BNP Paribas. "Anecdotal evidence suggests that bar and coin demand remains high in the U.S. and Europe, with physical gold being bought as a safe haven. We expect gold to reach new highs in 2012, although episodes of extreme risk aversion may trigger corrections along the way."

This means that still other experts are predicting gold prices will fall if the U.S. economy shows signs of slowing, taking an almost opposite tack to those that believe low dollar security will drive up prices in a flagging economy. "If you get a disappointing nonfarms [jobs report] tomorrow, you may see a flight into short-term market U.S. dollar securities. That tends to create a corrective action in stocks and in precious metals," said Richard Hastings, macro strategist at investment bank Global Hunter Securities.

Differing Opinions Make for Murky Market

So, depending on who you ask, gold will either reach record highs or drop in price. And, depending on who you ask, a strong American economy will either drive gold to record highs or a drop in price. Oh good, as long as we're all in agreement then...

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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