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Gold has much further to travel before hitting bubble territory

Although bull markets never travel in a straight line, gold has much further to go before hitting bubble territory.


There’s no stopping the gold bull at present.

The precious metal continues to set record highs on a regular basis, with the latest coming in Monday’s New York trade at US$1,173.50.

Although prices have pulled back from the high, gold remains in previously unchartered territory of more than US$1,160 per ounce.

“Although bull markets never travel in a straight line, gold has much further to go before hitting bubble territory.”

The headline pattern on the weekly chart is the broad consolidation pattern between March 2008 and October 2009. This period lasted for over 18 months and was approximately US$300 in depth. Given the sustained break of the October high of US$1070, we have a longer-term target of around US$1200, followed by the US$1315 region, measured by projecting the depth of this range up from the breakout level.

The US dollar’s protracted weakness of course remains a central factor in the resurgent enthusiasm for precious metals. It is not just a US dollar story though. Driving gold’s march higher is an increasing lack of faith in paper currencies generally, albeit to varying degrees.

Gold has surged to fresh highs against sterling, in excess of GBP700 per ounce. The uptrend looks a little different in terms of euros and the Aussie dollar, due to the greenback’s fear driven strength against both currencies that occurred in the opening quarter of this year.

Nevertheless, euro gold is in the immediate vicinity of February 2009’s EUR784 high. Gold priced in Aussie dollars is closing in on $1,300, after remaining resolutely above $1,100, even while the Aussie dollar rallied against the Greenback.

Of course, such price strength often comes before a correction, particularly when accompanied by the surge of mainstream popularity that is currently the case for gold. Having said that, the investment case for gold remains strong, driven by declining global supply and rising demand. Although bull markets never travel in a straight line, gold has much further to go before hitting bubble territory.

As we discussed last week, the prospect of central banks becoming net buyers of gold, rather than net sellers, is a potent addition to the metal’s supply/demand dynamics. This is particularly so given that central bank selling has previously filled the industry’s supply shortfall.

Adding further evidence in support of this view is Russia’s recently released gold trading activities for October. Russia’s central bank bought 15.5 tonnes of gold last month. This takes the country’s total gold purchases over the last 2 years to 159 tonnes.

The Central Bank of Russia’s total holding of 658 tonnes puts it among the top 10 of world central bank gold holdings.

The Central Bank of Russia currently holds around 5% of its currency reserves in gold. The bank has however commented that 10% would represent an appropriate weighting, with the result that Russian buying is likely to remain in force for many years yet.

It’s a similar story for China and India. The UK on the other hand no doubt rues the day Gordon Brown decided to sell half the country’s gold reserves at the bottom of the market, with his final sales marking the end of the bear market in 2001.

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