Gold prices bounce back in February – what will be next?

The uprise in gold prices during February was after the falls gold suffered in January. What will be of gold in March? Let’s examine the gold market and try to come up with a forecast for gold in March:

In the last quarter of 2010, there was a rise in supply by 14%, and a fall of 6.3% in demand compare to third quarter; however the total demand in 2010 rose by nearly 10% compare to 2009, while supply only rose by 1.8%. This shows that the gold market isn’t tight as supply is still higher than demand for gold during 2010.



Table of Spot Gold prices demand and supply 2009-2010

How will the gold prices react in March? There are reasons for gold prices moving up in the next several weeks to come, and there are also reasons for gold price to show some weakness in the more long term outlook. Let’s break it down the reasons for each direction:

The major reasons for staying bullish about gold are:


  1. China and India’s growing economics: these two huge economics continue to grow rapidly and their demand for gold also rises with their economies’ growth; as long as these economies will continue to be strong, their rise will probably reflect in high demand for gold;
  2. The US economy continues to be weak: even after the stimulus plans were executed (QE1 and QE2), the economy is improving but is still a long way from being recovered. As long as the US isn’t doing well, many investors will be hesitant in investing in US economy’s instruments (e.g. government bonds) ;
  3. Lack of confidence in US dollar: due to the QE1 and QE2, many consider these moves to drop the level of confidence many investors had in the dollar mainly since these quantitative easing plans are sort of an inflation tax in disguise: as the Fed printed money and buy with it US government bonds, this process is de facto a two stage government printing money plan, with the Fed acting as the middle man. This means the value of the dollar should weaken (and it did compare to AUD and CAD, but not compare to the EUR as we will see next) and the inflation should rise (even though it doesn’t for now). Therefore, it’s reasonable to asses that these plans might only weaken the dollar and further drive investors into commodities;
  4. The same goes for the Euro area and the Euro as Ireland and Greece fell in 2010 and 2009, respectively and weaken the Euro area and its currency, and drove many investors to the commodities market and away from Euro area investment;

Reasons for seeing eventually (the only question is when) of gold prices falling:

  1. The supply continues to be higher than the current demand (see the chart below) as long as the market isn’t tight. This means that it’s more speculation hiking gold than actual supply and demand forces as the price is mostly driven by speculation and investors seeking out a safe haven for their cash after the 2008 crash.;
  2. Psychological factor: The argument of “gold can’t fall, because it always went up” keeps many investors in a state of euphoric mode thinking that gold isn’t a dangerous commodity and the past can be a reliable factor to fall back on. Just like the famous example of a turkey who lives all year and being fed only to be slaughtered on Easter: that Turkey will also say up to Easter eve that it can’t be that someone will want to harm him..

gold charts demand and supply gold Q4 2009-Q 2010

Gold prices Outlook in March and beyond

In the following month we will probably continue seeing gold prices acting up and investors still being confident in gold as a safe haven, however after the bullish run it had in February, gold will probably rise at a lesser inclination than in February. In the long run, I still speculate that as the major economies continue to recover (US and Europe) and investors’ confidence will be restored to invest in stock markets and T bills of these economics, we should probably see a shift back to these markets which could cause gold prices to fall. This scenario will probably won’t happen anytime soon, but I think that eventually we will see it coming as the current price seems way too high for this commodity and doesn’t reflect the actual supply and demand forces.




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