Gold Summary:  Gold was higher today (Thursday) in what so far appears to be ordinary fluctuation in a declining market..   The price hit a high of $1,034 on March 17 but has since fallen back to last week's low of $846 and recovered in the past few trading days to settle at $882.10 today.   Click for a chart of June Gold, the most active contract (scroll beneath the chart for a computerized technical analysis)  Click here  to put recent activity in a longer term context.  (Click here for futures quote) ( here or here or here or here or here or here for 24 hour spot price).

At a time when so many commodity prices are rising it would seem that gold would also continue to rise, but it has been almost 2 months since it hit its high and has not resumed its rise since.  More significantly the demand for physical gold has not gone up, but instead was significantly lower in the most recent reported quarter (4th qtr. of 2007).  Total demand was down in almost all categories, especially jewelry (which usually represents about 70% of total demand), which was17% lower than the previous year.. 

Although stabilized in recent weeks the number of long speculators in the New York gold market fell sharply last month after hitting the highest point in history at 315 thousand contracts almost 2 months ago.   Based on the latest weekly report (as of April 29), the number of long speculators (which helps the price to rise) fell by 1 thousand,  now at 246 thousand contracts, a significant drop from 2 months ago in the number of speculators interested in buying gold.  (The number of large long speculators decreased by 7 thousand but was offset by a rise in the number of small speculators in the latest week (ended April 29).)    (Click for actual figures for the years: 2002 - 2008  2001  2000  1999.) 

The number of total open contracts in the New York gold market hit the highest in history Tuesday, January 15, at 593,953,  over four times as many as normal and the highest number of open contracts since the Comex began trading gold in 1975.  Now the number of open contracts has fallen back to 435 thousand contracts and is likely to fall further as speculators who entered the market recently are now losing money.  

Although the indicators are now negative in the short term, the potential still exists for a large rise in the gold price in the longer term, particularly if the U.S. Dollar resumes its weakness.  The potential exists for gold to rise well over $1,000, possibly as high as $1,500 or even $2,000 or higher if the gold resumes its uptrend.  (Under almost similar circumstances in 1979-1980, the price of gold and silver tripled, or more.)  The principal similarities to the markets of 1980 compared to now are that Crude Oil is rising to record prices and the value of the U.S. Dollar declined to record lows.  One  significant factor so far remains different - interest rates soared in 1979-1980 but that has not been the case up to now (at that time longer term Treasury interest rates were over 15%, while the prime borrowing rate reached 21%).

Gold has been influenced by the Crude Oil  -  the JUNE Crude Oil contract (now the most active contract) closed today (Thursday) at $123.69 from $123.83 yesterday.   It was largely the rise in the Crude Oil price which helped bring gold to its present high levels so it is quite possible that a decline in the Crude Oil price could cause the gold price to decline although a continued rise in the Crude Oil price would tend to be positive for the precious metals.   (Click here for a 2 year gold chart -  click here for a 10 year chart).   

As the gold chart shows, the gold price rose to highs not seen since 1980.  The 9 day relative strength is typical of other indicators as well - it would normally be overbought between 70 and 80 (although it could go higher) and oversold between 20 and 30.  Now (Thursday) it is at 45, still below its previous high of 87 (hit on September 23) but above the low of 17 hit last year.  

Long speculators outnumber the shorts by 57% to 14% (as of April 29).

The JUNE  U.S. Dollar Index was little changed today (Thursday), closing at 73.66 from 73.69 yesterday,  near the highest point in in 2 months, although still not far from the lowest close in the past quarter of a century and still well below the high near 92 hit in November 2005.  The U.S. Dollar Index is still a long way from its high around 120.00 which it traded at in February 2002.  (Click here for more info about the U.S. Dollar Index and click on the "U.S. Dollar Index" in the right column.  Click here for a longer term chart of the Dollar.) 

Demand for physical gold was at its highest during the bull market in stocks in the 1990's when public interest in investment was at its highest and there was more money around with which to buy gold jewelry.  Since then demand for physical gold has been mostly declining.

The gold price is heavily influenced by day traders.  Usually 95% or more of the trading is done by day traders.  

Because of the high volatility gold traders may consider the use of gold options.  A good place to get futures and options prices is at the New York Mercantile Exchange, the largest and most significant market for gold futures trading.  (Click on the gold link in the lower right part of the page, then follow the pages to the "options" link - you can click on the "call" or "put" options - don't forget to change the month at the top of the page - October is now the most active but other months are also available.)  (Another good place for gold option prices is on this link - click on either Call or Put in the far right column.)  

The JUNE  Canadian Dollar contract closed today (Thursday) at .9822 from .9930 yesterday, still below its high near $1.04 in November (2007).

The JUNE  Australian Dollar contract closed today (Thursday) at .9387 from .9386 yesterday, near the highest point in modern history.

Some physical gold fundamentals: 

For the latest available supply and demand figures for physical gold, the World Gold Council has published actual figures for the past several years. 

Demand figures for the full year of 2007 show total demand for the year was up 4%, but maybe more significant is the latest reported quarter, (4th quarter of 2007) total demand was down 17% for the quarter (843 metric tonnes vs. 1,013 last year), largely due to a 17% decrease in jewelry demand.    This was a period during which the dollar was making new lows,  widely thought to increase gold investment, but so far it has not.  The lower demand may be due to the big increase in price, suggesting that higher gold prices will decrease the demand.  

A very fundamental issue is whether the gold can continue to rise when supply is up and demand is down and remains at relatively low levels compared to the demand during the 1990's (click for latest supply and demand figures).  

When the gold price did in fact break out and soared in 1979-1980, there was actually a demand for physical gold and a rise in price was justified.  There were often long lines at gold dealers as many people rushed to buy Krugerrands and other gold investments.  Nothing like that is happening now as so far the demand is mostly confined to the futures market.

Demand for gold was helped by the bull market in stocks during the 1990's when there was more money to buy jewelry. For example, global demand for gold jewelry was over 3,700 metric tonnes in 1996 compared to only 2,425 in the year 2007.

As an indication of the public's interest in gold now, following are the figures published by the U.S. Mint showing the amount of gold sold by the U.S. Mint in the form of "American Eagle" coins bullion sales (in no. of ounces):

Judging from these figures, it appears there is no rush to buy gold coins in the U.S. - in fact it appears that more gold coins were sold when the stock market was rising.  This helps to make the point that more gold is bought during good economic times when people have more money to buy gold, not during slow times when people have less money to spend.

There doesn't seem any reason that anyone can worry about a shortage of gold now or in the foreseeable future.

(Most of the remarks below are repeated:)

To put the recent rise in context of what the gold has been doing, click here for the price going back to 1974.  Click here for the gold price chart since 1971 in several different currencies. 

The number of contracts in the gold futures market grew to record numbers, not seen since gold began trading in the New York Comex in 1975, and stayed there for all of the past year as many funds and other speculators stayed in the market longer than they have during ordinary rallies.

Recent differences with countries with whom close economic cooperation is necessary has cast uncertainty on future trade activity and its affect on the value of the dollar.  This type of uncertainty is not too much unlike what occurred in the late 1970's, although with one major difference, interest rates, had then soared as high as 15% for long term Treasury Obligations. In spite of that, the U.S. Dollar continued to fall and it was not until 1980 when a new administration was evident that things turned around.

Confidence in the future stability is a principal factor determining the value of the Dollar and with it, the gold price. With uncertain relations with previously strong allies whose trade and cooperation is needed to maintain the stability of the Dollar, the strength of the Dollar cannot be relied on, particularly since it is in a downtrend which began 4 years ago. The future is unpredictable and uncertain.

The precious metals futures markets have reacted along with the U.S. Dollar, beginning to rise as the Dollar declines, a situation similar to the late 1970's. So far the reaction is minor compared to the runaway we saw in 1979-1980, but an acceleration is possible, particularly if gold can surpass previous resistance at the $420 - $430 area (these figures refer to when this was written, about the beginning of 2004, four years ago).

Industry Hedging:

There has been a lot of talk about some mining companies planning not to hedge as much as they have in the past.  Of course there have always been some companies who don't hedge believing in the long run that prices will average out.  However, if mining companies have cutback on their hedges, it is contradicted by the present position of industry hedgers. 

The futures market exists for the benefit of miners to take advantage of high prices when they occur in the futures market.  A miner can lock in a good profit in the futures market when prices are right. 

If a mining company passes up the opportunity to lock up a good profit, he will then be speculating instead.  Sometimes he will be right and other times he will be wrong.  The subject of hedging has been discussed for centuries and there are many different attitudes toward it.  However, most businessmen agree that if you can lock up a profit rather than speculate, you should do so.  

Those miners who decide to speculate rather than hedge at a profit put their companies at risk if the price goes the wrong way.  For an ongoing business not to hedge in a good profit, would be considered irresponsible or just plain greedy by some.  Solid, long lasting companies are usually not based on speculation.

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What influences the gold price?:

A constant issue in the gold market is what influences the price.   Most people logically believe the supply and demand figures in the physical gold market will determine the price.

However, the futures market in New York is the single largest place in the world where more gold contracts are traded than any other.  The price at which the physical gold changes hands, in almost all cases, depends on the price at the New York exchange.  Practically all gold bullion and gold coin dealers will base the price of their transactions on this price.

Therefore, the supply and demand at the NY exchange is probably the single most important factor (at least in the short term) in determining the outlook for the gold price.  We can see large changes in the supply or demand in the physical market, but if the price does not first change at the exchange it is not likely to change the price of the physical gold.

Of course, in the longer term, supply and demand in the physical market will cause the futures market to change accordingly, but significant and sustained changes in the physical gold market are few and far between. 

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*Prices are those on the New York Commodity Exchange (Comex), part of the New York Mercantile Exchange, the principal market for gold futures.

*Commitment of Traders percentage figures rounded off.

** Open interest figures refer to the previous day's trading since they are not released by the exchange until the following day.