Technical indicators do point towards a bear market, and the second quarter is historically slow for precious metals. With the global economy showing signs of recovery, gold prices would ordinarily decline.
However, central banks are pushing for inflation, and whilst interest rates are 0%, investors will look to invest in commodities rather than funds backed by paper money that is effectively worth nothing.
Whilst central banks continue to produce electronic money out of thin air, currency will remain weak and prompt asset purchasing such as precious metals. The European Central Bank are also considering their own Quantitative Easing which, in the current climate looks good for a gold bull
Gold futures in balance
Gold looks set for another stint in the balance until investors see positive signs in the equity market. Precious metal prices had been expected to fall this year, but tension in the Ukraine and evidence of a slow economic recovery put the brakes on falling prices and gold rallied to a $1379 high.
Commodity analysts point towards the seasonal decline of gold in the second quarter, but acknowledge the $1300 strong point is a psychological technical barrier. The sentiment seems to be that if gold prices can close above $1320 by the end of the week they will continue to grow, otherwise prices will slowly decline over the next three months.
With tensions in Ukraine resurfacing there is not likely to be a dramatic sell-off, and if geopolitical influences persist over the coming weeks, gold prices will continue on an upward trend. That being the case the demand for physical gold will decline again as it did in February.
The price of gold over the coming months will depend heavily on the US economy. Data published last week showed mixed signals, with manufacturing and factory figures up, but job data and housing lower than expected.
Although there is significant signs that the US economy is increasing, the slow growth is affecting the decision making of traders. The next major decision which will influence precious metals will be whether the Fed commit to tapering their stimulus program and increase interest rates in early 2015.
If Janet Yellen sticks to her guns and continues to reduce QE and increase interest rates, gold prices will fall as the US dollar strengthens. However, the “cheap money” created by buying government bonds has pushed up the value of equities and subsequently shares are over-valued meaning impending doom for some businesses and gloom for their investors.
There is particularly a lot of skepticism among Wall Street analysts who are convinced the current economic data is fake and that the robust forecasts proposed by the Fed shows the economy is stronger than it actually is. Weakening stock prices and a slow property market suggests the economy is not recovering.
The credit culture is weighing heavily on the current revival and the central banks can only prop the debt ceiling up for so long. Regardless of which way gold prices go in the next three months, it will not be too long before they go up and continue to rise.