After the tremendous rise seen in gold prices since 2008 till the current date, it seems that prices may continue their rally as gold may, once again, benefit from the same factors that boosted its prices to record high, yet the gold's advance is much linked to what will happen in the dollar's value.
Since the eruption of the financial crisis in August 2008, gold started a strong upside trend that remained firm, where it gained further strength over the past few months to take prices to a new fresh high of $1920.92 an ounce recorded on September 6.
Firstly, gold took advantage of all of its characteristics which are safe haven, inflation hedge and store of value since the beginning of the crisis which drove major economies into the most severe and synchronized recession since World War II. The turbulence in financial markets, which pushed shares to record low, as well as the gloomy outlook for major economies, has increased the appeal of gold as safe harbor. In addition, policy makers in response to the downturn started to cut interest rates and spend trillions of newly printed money, know as quantitative easing, thereby triggering demand on gold as a store of value since currencies began to lose their values with the aforesaid monetary interventions by central banks.
The large spending by governments, also, has resulted in a rise in inflation. Oil prices rebounded from a low of $35.65 a barrel in February 2009 to a high of $114.80 in May 2011, pushing inflation higher to levels exceeding the targeted rates set by central banks; thus, gold got another impetus as a hedge against inflation. By the end of 2009, global economies started to exit recession and show positive growth figures in addition to an improvement in financial markets, yet another shock came this time from the euro area as the situation in Greece was very concerning as the peripheral nation asked for a bailout from the EU and IMF to finance its huge budget shortfall.
The European agony, thereafter, moved to other euro zone peripheral nations such as Portugal and Ireland which also received bailouts, thereby giving uplift to gold as a safe haven. In fact, the budget deficit problem which resulted from large spending by governments led the world to a new bubble which prompted policy makers to launch sharp austerity measures to trim the skyrocketing budget squeeze. Accordingly, the grim cycle returned once again to the starting point as the sharp spending cuts by governments shaved growth and edged up unemployment, threatening that global economies are in the throes of a new crisis, especially after the drop in equities to levels close to those seen after the 2008 crisis and spread of debt contagion to large euro area nations such as Italy and Spain. The main cue, however, came after the downgrade of U.S. top sovereign rating by one notch to AA+ by S&P as markets went on the rampage and the panic pushed gold prices to the above motioned record high.
Yet, now the question remains will gold continue its runaway to other record highs? Some may argue that Yes gold will resume its gains as fears are still persisting in markets, where there are talks of another round of stimulus, and some central banks intervened to salvage their economies. The recent lackluster data, which showed that the pace of growth has eased in second and third quarters, increased worries that global economies will experience a double dip recession. President Obama proposed $447 billion job stimulus plan and Bernanke said the Fed still has many tools to reinvigorate the world's largest economy, raising speculations the Fed would launch a third round of non-standard measures in the upcoming meeting on September 20-21. On the other hand, the ECB halted its tightening, after raising borrowing cost by 25 basis points in April and July, and resumed providing banks with cash, where it also purchased for the first time Italian and Spanish bonds after their bond yields climbed to record high. Nevertheless, the jittery situation intensified with the interventions seen by the SNB and BoJ to curb the advance of their currencies as it threaten the two economy's exports.
Last week, the SNB, surprisingly, decided to set a ceiling target for the franc against the euro, the Alpine country's main trading partner, at 1.20 and pledged to "enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.” This step by the SNB, which was preceded by an interest rate cut, raise in sight deposits two times to 200 billion francs from 80 billion francs, repurchase of outstanding SNB bills, and adopt of foreign exchange swaps, helped gold to rebound as it raised concerns that central banks are depreciating their currencies, thereby enhancing demand on gold as store of value. On the flip side, the BoJ intervened through selling yen for three times this year and may intervene in the coming period if the yen did not decline. However, gold prices were negatively affected by the rise in Dollar that became a favorite safe haven amid the interventions from the SNB and BoJ which reduced the appeal of the franc and yen as refuges. Thus, it seems that the coming path of the gold will probably be determined by the dollar price. If the Fed opted to introduce another stimulus in their coming meeting, the dollar will probably depreciate as the oversupply resulting from the money printing will lower its value. However, if the Fed did not launch any convincing measures, worries may continue, thereby enhancing demand on the dollar as safe haven, which, in turn, will affect all dollar-denominated commodities, led by gold, which has a strong negative relation with the greenback.
Technically speaking, gold is now trapped between support at $1700 and resistance at the historic high of $1920. A breach of areas between $1700.00 and $1690.00 will bring a strong selling pushing the price towards $1572.00 which represents the last line of defense - the medium-term support level- which may prevent gold from falling to test the moving average 200 at $1300.00, where we do not believe that the support at $1475.00 will be able to stop the fall. On the other hand, stability above the $1900.00 again may weaken $1920.00 and facilitate the reach of the extended resistance at $1940.00, where the breach of it would make the visit of $2000 areas more inevitable.
