2009 YEARLY OUTLOOK ON GOLD " THE YEAR OF VOLATILITY WITH UNCERTAINITY"
FIRST-
Prices are falling fast as financial institutions cut exposure across all markets
SECOND-
The current turmoil in the financial markets is creating enormous confusion and demand for dollars is rising as investors head for cash, all of which is weighing on Gold
THIRD-
Expect Gold to attract more investment buying once the dust starts to settle as confidence will be rock bottom and investors will want a safe haven
FOURTH-
Hard to imagine given the current performance, but Gold prices could rise to new record highs once the distressed selling has finished and investors realise the dollar may not be the safest place to take shelter
THE BIG PICTURE
The Western banking system is in a crisis and as this plays out, the wider financial system is suffering. Institutions have been hit by the credit crunch and as such they are retrenching and deleveraging in an effort to consolidate and stabilise. However, the result has been a deepening of the credit crunch and that in turn is affecting the wider economy. The ramifications of this are enormous and one can only hope the domino effect has been contained by concerted central bank and government action. There is a high risk, however, that there is more pain to come and if this is the case then the markets could suffer considerably more. Given this uncertainty and the risks the markets still face, it seems highly likely that more Gold will be bought as a safe HAVEN
FACTORS DRIVING GOLD PRICES:-
The dollar – In addition to the factors mentioned in the above section regarding the dollar, other factors are also providing support for the dollar. The deteriorating outlook for European growth has pushed the euro down against the dollar and falling commodity prices have seen commodity currencies fall against the dollar too. In addition, a much weaker oil price means less dollars have to be sold to buy oil. These trends will remain important for the dollar, but if there is a shift in confidence in the underlying value of the dollar, then further dollar weakness is likely.
Central Bank diversification – On average, central banks hold around 10 percent of their foreign exchange reserves in Gold, with the US holding 78%, Germany and Italy around 67%. By contrast, China, Japan, Russia and Taiwan who also have large foreign reserves, hold only minimal amounts of Gold. China holds 0.9% of its reserves in Gold, Japan 2.1%, Russia 2.4% and Taiwan 4%. With a significant proportion of these reserves held in dollars, there must be considerable pressure for these central banks to diversify their dollar holdings. Indeed, the combination of the current financial crisis, a rise in the dollar and a pull back in the Gold price may well provide an attractive incentive to find ways to diversify. Even if these countries do not buy Gold, the likes of China, which is resource hungry, could decide to spend some of their dollar reserves buying other much needed commodities for their strategic reserves, such as copper, iron ore and oil. In turn, if this weakens the dollar then it could underpin Gold too.
Oil – Oil and Gold prices have been positively correlated for most of the bull run. Indeed, the turndown in oil prices in mid-July this year coincided with weaker Gold prices too. At some stage, we would expect the correlation to break down as it would not be surprising to see oil continue to suffer, as the prospects for demand fall and the outlook for global growth slows, whereas Gold’s safe-haven attributes are likely to support it and indeed boost it before too long. However, as oil and energy products tend to make up a big proportion of commodity baskets, the selling of these baskets is another reason why Gold prices are suffering, even though the market might not actually be that bearish on Gold. Going forward, once the rout in oil runs its course and with OPEC likely to attempt to support prices, we would expect the negative impact on Gold to SUBSIDE
TECHNICAL OUTLOOK ::
Gold prices have fallen back and breached the up trend line that started in mid-2005 and have decisively broken the 60-week moving average (300 day), which had underpinned the market throughout 2005, 2006 and 2007. Prices have also fallen below the 2006 peak at $730/oz, which puts the lower peaks seen in 2006 and 2007 into focus as possible support areas. These range from $690/oz down to $650/oz. Just below there at $640/oz is the area where the 60-week moving average, the up trend line and the low price from August 2007 all converge, which may also be a natural support area.
While Gold is undoubtedly oversold in terms of some measurements, as important supports and retracement levels have been broken, bulls will wish to see considerable consolidation before regaining any significant level of confidence. However, if consolidation now follows and a base is built, the overall long term up trend could still carry prices higher. However, it would take a move back above the breached up trend line at $770/oz and really the $820/oz resistance level to start making the chart look less vulnerable. On balance, we would now look for consolidation to set in and to be followed by further upside initiatives in the months ahead.
FORECAST & CONCLUSION ::
With Gold setting new record highs and attracting huge investment and speculative inflow, it is not surprising that profit taking set in. However, over the past few years, we have seen times when the broader market goes into risk reduction mode and that carries Gold prices down with it, but for prices to bounce back once the liquidation selling pressure abates. Although this current sell-off could be saying the bull market for Gold is all over, we do not think this is the case. This current weakness is on the back of deleveraging, which is a severe form of risk reduction, but there is little doubt that the underlying fundamentals for Gold have improved in that the very foundations of the Western financial system have been shaken. When the dust starts to settle, investors are unlikely to have much confidence in any assets, but money will need to be invested in something and assets with intrinsic value are likely to shine above paper assets. Likewise, the dollar is rising strongly, but this seems to be for mechanical reasons associated with the dollar being the World’s trading currency (when things are cashed in, it tends to be for dollars and with banks not lending freely, there is a technical shortage of dollars, hence the dollar is in strong demand), but these are not fundamental reasons. Given the dollar is the currency of the current financial system, in time the weakness in the system is likely to be reflected in the value of the dollar. If this happens, then Gold is likely to rise in value as it is seen as the only quasi-currency not linked to any one government or tied into any one financial SYSTEM.
Overall, given the state of affairs, it does look as though there will be no quick fix to the current problems and the situation may well deteriorate further before stability returns. As such, investors’ confidence is likely to be shaken further and once financial institutions have deleveraged and the dollar tightness this is causing eases, then money is likely to flow into safe havens. As such, it seems likely that there is still a big window of opportunity for Gold to shine in the months ahead, but as always, the timing will be very difficult to judge and it will probably be best to sit on the sidelines until the market starts to lead the way. All said and done, we would not be surprised to see Gold prices rise to new highs, possibly significantly new highs, between now and the end of 2009, while we feel any further downside from here is likely to be short-lived and be followed by higher prices. Overall, we would expect the bulk of trading in 2009 to be within the $700/oz to $1,300/oz range.
FIRST-
Prices are falling fast as financial institutions cut exposure across all markets
SECOND-
The current turmoil in the financial markets is creating enormous confusion and demand for dollars is rising as investors head for cash, all of which is weighing on Gold
THIRD-
Expect Gold to attract more investment buying once the dust starts to settle as confidence will be rock bottom and investors will want a safe haven
FOURTH-
Hard to imagine given the current performance, but Gold prices could rise to new record highs once the distressed selling has finished and investors realise the dollar may not be the safest place to take shelter
THE BIG PICTURE
The Western banking system is in a crisis and as this plays out, the wider financial system is suffering. Institutions have been hit by the credit crunch and as such they are retrenching and deleveraging in an effort to consolidate and stabilise. However, the result has been a deepening of the credit crunch and that in turn is affecting the wider economy. The ramifications of this are enormous and one can only hope the domino effect has been contained by concerted central bank and government action. There is a high risk, however, that there is more pain to come and if this is the case then the markets could suffer considerably more. Given this uncertainty and the risks the markets still face, it seems highly likely that more Gold will be bought as a safe HAVEN
FACTORS DRIVING GOLD PRICES:-
The dollar – In addition to the factors mentioned in the above section regarding the dollar, other factors are also providing support for the dollar. The deteriorating outlook for European growth has pushed the euro down against the dollar and falling commodity prices have seen commodity currencies fall against the dollar too. In addition, a much weaker oil price means less dollars have to be sold to buy oil. These trends will remain important for the dollar, but if there is a shift in confidence in the underlying value of the dollar, then further dollar weakness is likely.
Central Bank diversification – On average, central banks hold around 10 percent of their foreign exchange reserves in Gold, with the US holding 78%, Germany and Italy around 67%. By contrast, China, Japan, Russia and Taiwan who also have large foreign reserves, hold only minimal amounts of Gold. China holds 0.9% of its reserves in Gold, Japan 2.1%, Russia 2.4% and Taiwan 4%. With a significant proportion of these reserves held in dollars, there must be considerable pressure for these central banks to diversify their dollar holdings. Indeed, the combination of the current financial crisis, a rise in the dollar and a pull back in the Gold price may well provide an attractive incentive to find ways to diversify. Even if these countries do not buy Gold, the likes of China, which is resource hungry, could decide to spend some of their dollar reserves buying other much needed commodities for their strategic reserves, such as copper, iron ore and oil. In turn, if this weakens the dollar then it could underpin Gold too.
Oil – Oil and Gold prices have been positively correlated for most of the bull run. Indeed, the turndown in oil prices in mid-July this year coincided with weaker Gold prices too. At some stage, we would expect the correlation to break down as it would not be surprising to see oil continue to suffer, as the prospects for demand fall and the outlook for global growth slows, whereas Gold’s safe-haven attributes are likely to support it and indeed boost it before too long. However, as oil and energy products tend to make up a big proportion of commodity baskets, the selling of these baskets is another reason why Gold prices are suffering, even though the market might not actually be that bearish on Gold. Going forward, once the rout in oil runs its course and with OPEC likely to attempt to support prices, we would expect the negative impact on Gold to SUBSIDE
TECHNICAL OUTLOOK ::
Gold prices have fallen back and breached the up trend line that started in mid-2005 and have decisively broken the 60-week moving average (300 day), which had underpinned the market throughout 2005, 2006 and 2007. Prices have also fallen below the 2006 peak at $730/oz, which puts the lower peaks seen in 2006 and 2007 into focus as possible support areas. These range from $690/oz down to $650/oz. Just below there at $640/oz is the area where the 60-week moving average, the up trend line and the low price from August 2007 all converge, which may also be a natural support area.
While Gold is undoubtedly oversold in terms of some measurements, as important supports and retracement levels have been broken, bulls will wish to see considerable consolidation before regaining any significant level of confidence. However, if consolidation now follows and a base is built, the overall long term up trend could still carry prices higher. However, it would take a move back above the breached up trend line at $770/oz and really the $820/oz resistance level to start making the chart look less vulnerable. On balance, we would now look for consolidation to set in and to be followed by further upside initiatives in the months ahead.
FORECAST & CONCLUSION ::
With Gold setting new record highs and attracting huge investment and speculative inflow, it is not surprising that profit taking set in. However, over the past few years, we have seen times when the broader market goes into risk reduction mode and that carries Gold prices down with it, but for prices to bounce back once the liquidation selling pressure abates. Although this current sell-off could be saying the bull market for Gold is all over, we do not think this is the case. This current weakness is on the back of deleveraging, which is a severe form of risk reduction, but there is little doubt that the underlying fundamentals for Gold have improved in that the very foundations of the Western financial system have been shaken. When the dust starts to settle, investors are unlikely to have much confidence in any assets, but money will need to be invested in something and assets with intrinsic value are likely to shine above paper assets. Likewise, the dollar is rising strongly, but this seems to be for mechanical reasons associated with the dollar being the World’s trading currency (when things are cashed in, it tends to be for dollars and with banks not lending freely, there is a technical shortage of dollars, hence the dollar is in strong demand), but these are not fundamental reasons. Given the dollar is the currency of the current financial system, in time the weakness in the system is likely to be reflected in the value of the dollar. If this happens, then Gold is likely to rise in value as it is seen as the only quasi-currency not linked to any one government or tied into any one financial SYSTEM.
Overall, given the state of affairs, it does look as though there will be no quick fix to the current problems and the situation may well deteriorate further before stability returns. As such, investors’ confidence is likely to be shaken further and once financial institutions have deleveraged and the dollar tightness this is causing eases, then money is likely to flow into safe havens. As such, it seems likely that there is still a big window of opportunity for Gold to shine in the months ahead, but as always, the timing will be very difficult to judge and it will probably be best to sit on the sidelines until the market starts to lead the way. All said and done, we would not be surprised to see Gold prices rise to new highs, possibly significantly new highs, between now and the end of 2009, while we feel any further downside from here is likely to be short-lived and be followed by higher prices. Overall, we would expect the bulk of trading in 2009 to be within the $700/oz to $1,300/oz range.
FOR SILVER FORECAST FOR 2009 " THE YEAR OF VOLATILITY AND UNCERTANITY ~~~ FOLLOW LINK :: http://munnabhaianalyst.blogspot.com/2008/12/silver-forecast-for-2009-year-of.html
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