Will Gold Break Through The Psychological Benchmark?

 Today the gold price reached a top of $1005/oz. The last high that was reached was in March of 09 and the instance preceding that was in March 08. The gold price has been trending upwards in what seems like a continuation pattern since March with support points at $880/oz in April and $930/oz in June. If the price clears the $1033/oz mark then it is anyone’s guess from where it will go to next. But a triple top could be forming with the fall in gold prices for the immediate term to below $900/oz.

If inflation is an indicator where the price will go there is enough reason to believe that gold will fall for the immediate term, as inflation currently stands at -1.89%, to at least $900/oz before another run up. Many have indicated that the gold buying season in India that the biggest gold consumer in the world is entering into, may push the price past this psychological barrier but recent reports have proven that with the high prices imports of gold have fallen by almost 31% and buyers are reverting to domestic scrap gold or holding out for cheaper prices.

This however this will not be the long term trend. As bailout funds starts to trickle down the markets, this excess cash will counter the deflationary effects of the slow down due to falling prices. When the economy does start to improve relative to where it has been, inflation will start to pick up aided by low interest rates. As one market commentator said on ABC a few weeks ago “there is too much money floating around at the moment”. This in turn will cause the increase in gold prices for the longer term. Many are forecasting that gold prices will hit at least 2,000 per ounce.

For the long term bulls of gold it may be prudent to keep in mind that Russia and China have been calling for an international currency to replace the US dollar. The head of China’s foreign exchange agency stated that China’s gold reserves had risen 75.67% to 1,054 tons since 2003. This is in addition to China following India and the world second largest buyer of gold with domestic demand increasing to 176% to 25 tons.

Gold will break through the psychological benchmark but not for the immediate future. Federal Reserve Chairman Ben Bernanke has indicated that the stimulus has not yet been spent or added to the economy. The M2 money supply has not yet shown dramatic increase in the economy but rest assured it will.

The possible explanation for the current price of gold testing its previous highs would be due to an anticipation of inflation or traders/speculators driving up prices. As it stands the fundamentals of the global economy would not support the rise of gold above the $1000/oz mark but those who have been patient could be well rewarded.

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