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Gold the winner in the worst week for global equities in three years but will the bounce continue to $1,400 an ounce?

 -- Published: Monday, 15 December 2014 | Print  | Disqus 

By Peter Cooper

Gold prices advanced 2.5 per cent last week despite a slip back on Friday to close at $1,221 an ounce while global equity markets were pummelled in their worst week for three years as oil prices crashed to new lows. The falling oil price took down the US dollar with it and that was good news for gold.

Falling stock markets have prompted some investors to buy the metal as an alternative asset, while a drop in the greenback made dollar-priced bullion cheaper for holders of other currencies. There was also a widespread whiff of deflation in the air and that may mean that interest rate rises are off the agenda next year.

Rate rises off?

It’s been the fear of interest rate rises that has put bullion prices under pressure this year. Higher interest rates would make holding gold less attractive as it pays no interest. If the global economy moves into a recession then lower or negative US interest rates would be on the cards and that will boost gold prices higher. Rates are already negative in the world’s largest economy the eurozone.

The Swiss referendum looks to have been the turning point for precious metal prices as ArabianMoney predicted (click here). Short sellers were so sure it would fail that when it did the bottom was in for the gold price and the rebound has been more than $100 an ounce.

The knotty problem is where prices go from here. Still lower oil prices before a bottom early next year would be good for gold. If the precious metal can clear about $1,255 an ounce then the technical charts point to a bounce to much higher prices towards $1,400 an ounce.

The US stock market sell-off may also just be starting. US equities are the most overvalued in the world and its economy now faces the impact of a bankrupt shale oil sector which has been its biggest borrower in recent years. Being the world’s biggest oil producer has massive downside in an oil price slump that could more than offset the good news for consumers.

Coming recession

At the same time the US economy is supposed to be leading the world out of an economic slump. It is more probable that the world will suck the US back into a recession than vice-versa. The stock market could decline 70 per cent in such circumstances with bonds and precious metals the obvious safe havens.

Except that the bond market may also now be in its final days. The 30-year bull market looks exhausted with yields close to record lows. If bonds and equities collapse at the same time then the only game left in town will be precious metals and that would result in a 1980-style spike in prices.

In that scenario $1,400 an ounce would be a drop in the ocean. Gold above $10,000 and silver at $500 an ounce are easily achievable. It’s remarkable how bombed out confidence in precious metals has become recently given this upside potential though that is what a three-year bear market does to market sentiment.

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 -- Published: Monday, 15 December 2014 | E-Mail  | Print  | Source:

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