Gold Shining Up Nicely
The short-term bounce in commodity prices has continued this week in line with firmer global equity markets and a slightly weaker US dollar. Greenback weakness has notably benefited precious metal prices, which are particularly sensitive to US dollar strength. My colleagues here at BMI see further upside potential for gold prices in the short term, based on a bullish technical picture:
• The chart of gold priced in euros is particularly promising. While this says as much about euro weakness as it does gold strength, it does tie in with the overall bullish technical outlook for gold.
• Interestingly, we have also seen a sharp reversal in the Gold to Silver ratio over recent weeks, which suggests that the year long trend of silver outperforming gold could be over.
Despite bullish short-term prospects, Risk Watchdog continues to identify medium-term risks to gold:
• Historically high gold prices mean that traditional physical demand for gold (eg jewellery) is weak and will likely remain so over the coming months.
• High speculative interest in gold has sustained high prices over recent months. According to the US Commodity Futures Trading Commission, net speculative gold positions reached an all-time high in November 2009, weeks before gold prices peaked.
• This reliance on speculative demand means that gold prices will likely remain vulnerable to shifts in investor sentiment over the coming quarters, as they have been in recent weeks. Given growing global macroeconomic concerns, Risk Watchdog’s sees a possibility that declining risk appetite could continue to retrench over the coming months and drag down gold prices.