Secular "Bullion" or Diminishing Marginal Returns for Gold

With all the uncertainty of the European debt crisis, gold prices have been rising recently. Gold prices seem to have levelled off a little. Spot gold is currently trading at about $1230 US. Friday was an all time high of $1248.95 according to Maytaal Angel in a Reuters article “Gold steadies as rally runs out of steam”, printed Monday May 17, 2010.
To put that in perspective, “gold is still some way off its all-time high of $850 an ounce in 1980, which would be over $2,200 in today’s terms,” said Richard Davis, with Blackrock’s Natural resources team.

Ole Hanson, analyst at Saxo Bank, “The momentum is with gold at the moment and, unless the market takes a different view of the Euro zone debt crisis, we’ll remain supported.” Maytaal points out that gold usually trades in step with the Euro and counter to the dollar as it is seen as an alternative asset to the currency. However, the metal has recently been bought as a safe haven asset and hedge against currency volatility. Even though the Euro has been falling and the U.S. dollar has been rising, so has gold. Gold’s use in jewellery has long since been a key factor in determining its price; however another important factor leading to the rise in gold prices is investment demand. The Economic Times reported, “Until 2008, about 60 percent of global consumption for gold went into jewellery, 25 percent to investment and the rest to industries. But in 2009, investment swelled to 37 percent while jewellery demands slipped to just over 50 percent…Analysts expect demand for investment to expand this year, utilizing ETF’s.”

Looking at IGT (iShares Comex Gold Trust) which seeks to correspond to the day-to-day movement of the price of gold bullion we can see the effect of the rise in gold prices over the last month. On April 26th, IGT’s current price broke through the 50 day moving average and the 100 day moving average. Both relative strength and MACD are positive and strong. The next point of resistance is at $125.55 so with the current price at just over $125, you may have some room for extra profits but not much if the current price is unable to break through this point from a technical perspective.

Gareth Watson of Scotia Capital advises, “You may want to consider locking in some of your recent gains. The uncertainty of Europe has caused investors to flock to gold; however, physical buying is expected to fall in coming weeks and the commodity has yet to really respond to the stronger U.S. dollar which could play catch up in the short term…..barring any unforeseen negative developments overseas.” To add to this Brooke Thackray’s Investor’s Guide warns, “Gold stocks also rank high this month, but be careful as they typically peak at the beginning of the month.” Another factor to consider is that as prices of gold increases, demand for jewellery decreases. India is the world’s largest buyer of gold, with annual purchases of about 800 tonnes and its total jewellery market is estimated at about $20 billion U.S. according to P. Vijian a writer for Yahoo News. This last weekend was the “Akshaya Tritiya” festival (meaning never diminishing) and his article argues “costly gold dampens India’s gold-buying festival mood” with experts predicting sales could be cut in half this year. Gold may have diminishing marginal returns in the short term but if David Rosenberg is right, this will be a short term overbought setback and the secular bull rally for gold will prevail.