Gold will shine: But short-term trade tarnished

Philip Salter
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A LONG-TERM bull market in the yellow metal has seen traders and investors profit to a tremendous degree. At the extremes, fiat money adherents – who don’t see the metal as a currency or store of value – have clashed with gold bugs, with the latter trouncing the former. However, the last quarter has tested short-term traders with a fixed view of gold’s future. And although gold should rise as the flawed, but seemingly inevitable, logic of the monetisation of private and public debt is playing out across Europe, the risks of corrections in jittery market conditions could stop out many ultimately correct long positions.

In the long run, all fiat currencies risk collapse – gold is there to pick up the pieces. “All this talk of a break-up of the Eurozone could see demand for physical gold boosted,” says Chris Beauchamp of IG Markets, “as people look to transfer their savings into something more solid than a flagging currency.” Sandy Jadeja of City Index notes that gold is back at a support level of $1,680, which may provide a launch pad for higher prices. Beauchamp is bullish: “On the technical view, gold, despite everything, remains firmly above its 200-day moving average, which therefore suggests a continuation (albeit with twists and turns) in the uptrend.”

However, as Angus Campbell of Capital CFDs points out: “The direction of gold in the past few weeks confirms that it is just as risky an asset as any other, putting doubt on its safe haven reputation.” He notes that ever since hedge fund supremo John Paulson started selling large chunks of gold ETFs, the precious metal’s bull run has been called into question. The Eurozone’s spiralling debt crisis hasn’t always coincided with further gold buying. Campbell says “for gold to get back in favour with the bulls we need a mixture of increased risk appetite, with a dose of dollar weakness and a fair share of uncertainty.” As Michael van Dulken of Accendo Markets points out, gold has moved from “doing opposite to equities (risk-on, risk-off), to mirroring it at some points (like yesterday).” This is in part due to the questioning of the safe haven status of the dollar.

The US economy is ailing, but Europe’s fate is terminal. The dollar should gain when the politicians of Europe admit – and the forex markets face up to – the unthinkable process of the Eurozone’s break-up. The courage of fiscal and monetary austerity required from Europe’s politicians to save the euro is beyond them. Gold will rise with the dollar and in the heat of crisis trading it should prove profitable. But the false hopes between now and then with make trading conditions choppy.