August 25th Weekly Gold Market Update
After being completely stagnant in the period before, the gold price finally found a direction last week – but unfortunately that direction was down. The fall began as soon as the markets opened on Monday and picked up speed as the week went on, with only a small upturn before Friday’s close. The week’s low was $1,276.30 and the closing price only a few dollars higher at $1,280.61. That’s a loss of $24 over the previous week, more movement than we’ve seen in a while.
So what caused the downturn? The main factor is likely to be the stock market. After losing 500 points in a rush three weeks ago the Dow Jones average has now climbed almost all the way back to where it was in late July. Returning confidence in equities naturally reduces the demand for gold and that’s probably what we’re seeing here. It’s worth noting that gold’s small rally on Friday coincided with a four-point reversal in the Dow; the historic pattern of precious metals tracking stocks in reverse seems to have re-established itself after a period of uncertainty.
The big question is where gold is going to go now. A lot of that depends on the stock market. The economic recovery isn’t looking anywhere near as robust as it could be, with several major indicators suggesting a reluctance to lend and consumer nervousness; these factors could drag the economy back down unless demand picks up significantly. Last week’s rise in equities could easily have been a correction from the previous sharp drop. It’s not clear right now if the rise will continue or if we’ll see a period of consolidation. If the Dow slows down we could easily see a revival for gold. On the other hand if the Federal Reserve decides to raise interest rates there’s likely to be a larger slump in demand.
At the moment there should be support for gold at around $1,275, which is going to be tested this week unless something changes drastically. If it drops through that it’s less clear where the next floor is and we could see new lows. Some analysts are looking at $1,265 as the next critical level, and there’s speculation that if it goes below that there could be long-term damage to the price and recovery could take a while.
There is some less bad news. Oil prices are remaining stable, with no sign of a rise on the horizon, which should reduce the pressure slightly. While the situation between Russia and Ukraine remains tense there’s now enough international opposition to the ISIS insurgency in Iraq that the threat to Iraq’s oilfields seems to be receding, so for anyone interested in commodities oil isn’t particularly attractive right now.
Overall it’s a time to be cautious about buying gold, but if the support at $1,275 holds and the price begins to recover that would be a definite purchase signal. If the price bottoms out at around its current level buying in to the market could work out very well.
