Gold price has dropped approx. 6% last week to around US$ 1,243 per ounce. Some analysts think that it may still drop another US$ 200 to as low as US$ 1,050 in 2017. These analysts believe that gold physical supply exceeds demand and will continue down until an equilibrium is achieved, and then upturn.
Other analysts, attributed this drop to the promising US monthly employment figures indicating approx. 156,000 new jobs created in September 2016, which, although below the target of 172,000, was good enough to increase the likelihood of a US interest rate hike by year-end. On the technical side, gold price has just dropped below the 200 day moving average, which is bearish and portends further falling. And, the RSI indicator is way down in weak negative territory.
As is the case with oil prices and other commodities, gold sometimes has life of its own outside the fundamental precepts of supply and demand. The role of traders (spot and futures) can influence prices to move in confusing directions in the short term. Accordingly, some analysts are watching a potential gold rebound in the next couple of days, but even then, it may be short-lived.
Gold is an investment that carries no return. Therefore, the higher the current interest rates, the more expensive it is to own and hold gold, and vice versa. However, gold holders ignore the issue of returns in times of grave political or economic crises – it then becomes a store of wealth. And today, no matter which direction you look, all you see are the threats of economic crises and collapse, or eminent wars; be they civil, local regional or even World Wars. How can a wise person not consider switching part of his wealth into gold?
Additionally, gold seems to be regaining its role as a currency reserve. China and Russia have been buying billions upon billions of Dollars of gold for the past 2 – 3 years. With US treasuries’ dismal returns, gold is not only regarded as more secure, but less costly to hold, and thus allows them to slowly slip the grasp of the US dollar.
Gold also has an ornamental value, which expects no returns – other than the appreciation of the person it is gifted to. India, remains the world’s largest buyer and holder of gold, primarily for personal and ornamental use. There are no indications that Indian demand for gold will change, regardless of the price level.
Finally, Gold mines production cost is estimated at around US$ 1000, which puts a firm floor under the price. This coincides with the target of US$ 1,050 which analysts had forecast gold to drop to in 2017!
It seems gold is in for downward correction, but should start seeing support at the US$ 1,050 level or higher.