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ROSS NORMAN : On paper gold has never looked better ...

On paper gold has never looked better ...

A faltering economy, creeping inflation and ongoing geopolitical issues are feeding a resurgence in demand for the yellow metal - and best of all it has cracked a critical six year chart resistance levels. If gold is really "the sum of all fears" then the gold price is saying that not all is rosey in the garden - best of all gold seems to have momentum behind it too. 

Year-to-date the US dollar index is off 10.3% and conversely gold in dollar terms is up 16.7% (or 10% for UK investors) and the market is eyeing the 12 month high of $1345 and the 2016 high of $1375 as the next targets. What could possibly go wrong ?

Well the problem is that word "paper" again.

Not all buying is equal - some is sticky and other types are flighty ... and it is the flakey end of the market that has driven the market higher, not the physical markets. Mints, refiners and brokers around the world report the same thing ... physical demand is weak. Meanwhile we have seen unprecedented buying on the futures markets - and it is an open question whether these typically short-termist buyers will stay the course, or succumb to the temptation to take profit.

Currently those shorting gold on the futures markets are near a five year low and the net long position has grown by a very significant 615 tonnes of "paper" gold in just 2 months. Not yet a record high but getting there. This paper buying is getting on for double what we expect central banks to buy this year. Meanwhile Indian and Chinese imports are at about 20% below the recent run rate. In short, there is a lot of speculation in the price just now.

The natural response is the price reflects reality and is justified, especially with "World War 3" a distinct possibility in some peoples view.

So what's my point ? Well it is that gold has got ahead of itself and rallies cannot be sustained without support from the 'real' market. Currently gold is behaving in its default mode which is to say price elastic - high prices are seen by real investors as something to be sold into and they buy the dips. That is until they flip their view of the outlook. 

What is needed to reverse that attitutude (something that happened to gold between 2000 and 2011) and for physical investors to buy (not sell) into price strength is "an event" - probably the sort of thing that not even gold bugs would wish for.

At the moment "an event" remains a possibility, but fear is rarely sustained for long. We get inured to it. Gold has sustained excellent momentum so far in 2017 but unless the real market is taken with it, then expect this years excellent gains to be a little blunted. In other words, 2017 becomes an exact re-run of 2016, but at a 10% higher price level.   


Ross Norman


Sharps Pixley, London

06 Sep 2017

About the author

Ross Norman

Ross started his business career with business guru Sir Clive Sinclair of Sinclair Research in Cambridge, before joining Johnson Matthey as Gold Refining Manager (then the worlds largest gold refiners), then as a gold trader at NM Rothschild & Sons (the Chairman of the London Gold Fixing) and later Credit Suisse, where he was a Senior Dealer in physical bullion trading.

Ross has an enviable record within the London Bullion Market in forecasting the gold price over the last decade and is frequently sought by the media for commentary on the bullion markets. Ross has made frequent appearances on TV (BBC, CNBC, CBC) in newspapers (FT. Wall Street Journal) as well as in the newswires (Reuters, Bloomberg and Dow Jones).


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