Stronger Gold In The Short Term

by: Rohit Savant

Gold prices could strengthen this week. If gold prices are able to break above $1,280 a run up to $1,320 should not be ruled out.

What Should Help Gold Prices

The primary factor driving gold prices higher this week is the Chinese Lunar New Year. The Lunar New Year holiday starts Friday, 31 January. The Lunar New Year is traditionally a strong period of gold buying among the Chinese. Chinese gold dealers are buying in advance of that holiday. Some of them waited in early January, when prices began rising, hoping prices would fall later in the month. Now these dealers need to purchase gold at higher prices, since prices did not subside relative to levels seen in early January.

Additionally Vincenza d'Oro, the big gold jewelry show in Vincenza, Italy every January, was very well received with active buying by the jewelry wholesalers and retailers from jewelry manufacturers, boosting demand for gold for fabrication into jewelry and stimulating additional bullishness in the trade.

Developments in emerging market currencies and the global equity markets also are expected to play a role in influencing the price of gold. Renewed concerns regarding the impact of Fed tapering on emerging market currencies and equity markets, is likely to benefit gold. At least initially, some of the funds that are pulled out of these markets are likely to enter the gold market. The gold market has had one of its worse years in recent history making it attractive at present levels. Even when a small amount of funds from the equity or currency markets move into gold it can have a large impact on the price of gold due to the relatively small size of the gold market.

The U.S. equity markets are near historic highs following a stellar performance in 2013. Economic, financial, and political developments around the world did not warrant the strength in the U.S. equity markets. Many of the problems that drove the global economy into a recession in 2008-2009 still persist and in some cases have gotten worse. Gold is off more than a third from its September 2011 peak, which gives investors reason to be considering purchasing gold at this time.

What are the Risks

There are risks to expecting higher gold prices. Chinese demand for one is expected to subside following the Lunar New Year celebrations. The post Lunar New Year period sometimes sees excess inventory sales. Last year, it was this selling by Chinese dealers that pushed gold prices from $1,680.90 on 6 February to $1,574.50 on 22 February. The lack of rebound from that sell-off from February through early April set the stage for the big drop in prices on 12 - 15 April. Shorts rose sharply during that two month period. Shorter term investors are still very negative on the gold market. If the decline in gold prices following the Lunar New Year is not met by substantial buying it could result in another decline similar to what was seen last year.

A decision by the Fed to continue tapering in its January meeting could be viewed by the market as a sign of strength in the U.S. economy which could push equity markets higher and weigh on gold prices. Beyond this week gold prices could soften but are unlikely to decline below $1,180. Demand from fabricators and longer term investors should provide support at those levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.