With the Greek drama taking an intermission and the euro strengthening at the US dollar's expense, it looks like gold wants to move higher – and has enough momentum to break through strong technical overhead resistance as we approach and possibly exceed $1,800 an ounce.
As we have pointed out in past Rosland gold commentaries (www.roslandcapital.com/news), it is important to distinguish the forces and players that drive gold prices in the short term – measured in days, weeks, and sometimes months – from those that determine the longer-term trend and average price over many years.
In the short term, the key players tend to be institutional traders and speculators – the trading desks at banks, hedge funds, and other financial firms – who operate principally in "leveraged" futures and derivative markets.
With little cash down, these are the folks who are most responsible for gold's sometimes-extreme price volatility, often with big ups and downs from moment to moment, day to day, and week to week. Rather than allowing long-term forces to push gold prices up at a more measured rate, these traders were responsible for driving gold sharply higher last summer to its all-time high near $1,924 (Sept. 6, 2011) and then reversing gear and driving the yellow metal back down to $1,525 or thereabouts.
What motivates these traders is the necessity to make short-term trading profits. This is what they get paid to do (often generously rewarded) and as such they have no lasting long-term interest or allegiance to gold as an inflation hedge, portfolio diversifier, or insurance policy against economic and political risk.
One moment they can be trading currencies, Treasury securities or index futures, the next gold or grains. Their decisions to buy and sell are often based on technical indicators, computer program trading models, or their interpretation of the latest economic indicators or geopolitical news.
While their collective trading volume and the size of their individual trades may, at times, be huge enough to move the price by more than a few dollars, they rarely operate in the actual physical market where bullion bars are actually bought and sold.
What does affect the physical market – the supply and demand for actual bullion bars – are the long-term factors that together set the average price over the years and decades. Here, the key players are:
- Retail and institutional investors who hold gold for protection against currency depreciation and debasement, domestic price inflation, and an assortment of political, economic, and financial risks.
- Central banks who hold gold as an official reserve asset whose value, unlike foreign currency reserves, is independent of sovereign issuer risk.
- Jewelry consumers, who buy for some emotional "feel good" needs and desires . . . or as a convenient and traditional form of gold investment (in countries like India and China). These buyers may become suppliers of gold to the physical market, taking profits when prices are perceived to be excessively high or when personal economic fortunes are bleak.
- And, mining companies who regularly add new supply to the market - but with total quantities changing little from year to year.
It is in this physical realm that the long-term average price is set collectively by the buyers and sellers of actual metal. And, it is our expectations of supply/demand trends for physical metal that support our bullish long-term forecast of much higher gold prices in the years ahead. It also explains why our long-term views depend little on the latest swing, however extreme, in the yellow metal's price.