Question: Hey Sherlock, where can I find a clue to tell me where the future price of gold is headed? Answer: Holmes, as in Frank Holmes. Click here to hear the Bloomberg Radio audio tape when Frank Holmes was interviewed recently by Kathleen Hays on The Hays Advantage radio program. Listen to the audio file carefully as it is the best explanation of what affects the price of gold, that I can remember. You will need to first listen to the audio file and then continue reading. Frank's explanation of "the love trade" and "the fear trade" are excellent.
In my last article I mentioned how tariffs in India should limit physical gold purchasing along with weakness in China. I took China weakness as a negative for gold as the Chinese should be less able to purchase gold. I was looking at Indian, Chinese, and emerging market purchases, "the love trade", as being most important. China was purchasing aggressively when gold was at $1200, but that buying has slowed down with the current gold rally to the $1380s.
However Frank Holmes explains that the fear trade is more important now than the love trade. Real interest rates are key. When the interest paid, less inflation is positive and/or rising, gold falls. If interest paid, less inflation is negative and/or falling, then gold rallies. He explains how we have recently had negative real interest rates, that occur during times of weakness in the economy when the Fed is trying to stimulate the economy. That is what he attributes to the current rise in the gold price. On the other hand, if the Fed can taper and eventually remove the stimulus, and interest rates rise, then gold prices will fall. Dropping copper and iron ore prices are confirming the weakness of our current world economy and that probably contributed to the rise in gold this past week, more so than the Ukraine.
If the weakness in our economy continues, Frank Holmes sees a possible 30% rally from the $1180 lows in gold to about $1550. We have already rallied $200 off the bottom, but we could still move up another $170, but not necessarily straight up. On the other hand, if the economy improves to the point that interest rates go up, then the price of gold could drop by the end of the year, and we could make new lows in gold, as predicted by Goldman Sachs and various banks and brokers.
Regarding Ukraine, I see this as a "buy the rumor, sell the fact" situation where they bought the rumor of problems in the Ukraine, culminating in the weekend succession vote. Since they bought gold going into this weekend, unless there is a catastrophic occurrence early next week, we should fall once the votes are cast, regardless of the result. Tuesday and Wednesday is the Fed meeting and likely continuation of the taper, and that should also depress gold some. So although we have been strong this past week, we might roll over shortly for at least a shallow correction, even if we don't get the intermediate correction of a $100 drop in gold, that I have been looking for. Either way, it should be interesting to see what happens next week.
Disclosure: I am long DUST.