Gold Summary:  Gold continued to fall today (Friday), now at the lowest point in 3 months and  below last month's high of $1,227.   (Click here for a 2 year gold chart -  click here for a 10 year chart).     ( Click here for April gold and scroll beneath the chart for a computerized technical analysis of the gold market.)

Based on the latest weekly report (as of February 2), the number of long speculators was down 12 thousand contracts to 308 thousand.  In spite of the recent reduction in the number of long speculators, the gold market is still loaded with a large number of long speculators, who are now potential sellers if the price continues to weaken.  (Click for actual figures for the years: 2002 - 2010,  2001,  2000,  1999.) 

The slow economy has diminished the number of  physical gold buyers which is reflected in the latest demand figures for physical gold.   Demand figures for the 3rd quarter of 2009 (latest available) show one of the sharpest declines in demand in recent history - total demand was down significantly in all categories - jewelry demand was down 32% while total demand for all uses (including retail investment, industrial demand, electronic trading fund (ETF) investment) was down 36%, a relatively huge decline in demand,   It has been mostly speculators that have driven up the price (reflected in the latest  Commitment of Traders report). 

A significant factor is the outlook for the stock market since commodity prices have recently been influenced by the sharp moves in the stock market.  As of the end of November (latest available) the price earnings ratio on the S&P 500 was 85, one of the highest since records were kept on the index in 1936.  The stock average remains overpriced in relation to earnings in the extreme, a very negative indicator since stock prices ultimately depend on earnings.   The ratio is very high when compared to an historical average of closer to 15 or 20 times earnings (click here for a chart of past price earnings ratios).  A falling stock market is potentially bearish for the gold. 

Some "investors" believe the economy is improving, but the encouraging indicators are few and far between.

The number of total open contracts now (as of yesterday, latest available) was 477 thousand contracts still below the record hit last year at almost 600,000 contracts.

An important factor is that under present economic circumstances, there is less money with which to buy jewelry or to invest in commodities, gold included. This is reflected in the low level of demand in the latest reports.  (Refer to the tables which show demand in tonnes, rather than dollars to get a more accurate picture.)  Demand for jewelry which usually represents about 70% of demand for gold was down 32% in the latest reported quarter (third quarter of 2009).

In spite of the recent rally, a resumption of the decline could potentially take the gold price down significantly if the U. S. Dollar resumes its rise.  Click for a chart of April 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 recent futures quote) ( here or here or here or here or here or here for 24 hour spot price).

The gold price could potentially fall to near $500 in a relatively short time.  As an example, after gold rose sharply in 1979-1980 to $850 it was followed by a drop to near $500 in less than 2 months.   It will not be surprising to see the gold price take a similar loss in a short time (click here for a long term chart). 

The March Crude Oil contract (now the most active contract) settled today (Friday) at $71.19.   It was largely the rise in the Crude Oil price which helped bring gold to its recent high levels - now the Crude Oil has fallen back from last year's highs.  Crude Oil is half of what it was less than a year ago.   

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.  Now that the global economy is mostly slowing, it is likely there will be even less money available to buy gold jewelry. 

The number of total open contracts in the New York gold futures market hit the highest in history on January (2008), 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.  The number of open contracts has since fallen back to 477 thousand.  

The potential still exists for a large rise in the gold price in the longer term if the U.S. Dollar resumes its weakness.  The potential exists for gold to rise possibly as high as $1,500 or even $2,000 or higher if the gold continues its uptrend.  (Under almost similar circumstances in 1979-1980, the price of gold and silver tripled, or more.)   One  significant factor so far remains different - interest rates soared in 1979-1980 but that has not been the case now (at that time longer term Treasury interest rates were over 15%, while the prime borrowing rate reached 21%).

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 (Friday) it is at 29,  still below its recent high of 91 (hit on November 25, 2009) and above its low in 2008 at 12.    

Long speculators outnumber the shorts by 64% to 14% (as of February 2,  latest available).

The March U.S. Dollar Index was higher today (Friday), closing at 80.59,   Any weakness in the Dollar may help the gold price (although the Dollar seems to have potentially found some support in its present range) which is still a long way from its high around 120.00 where 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.) 

The gold price is heavily influenced by day traders in the futures market.  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.  (Another good place for gold option prices is on this link - click on either Call or Put in the far right column.)  

The March  Canadian Dollar settled today (Friday) at .93.20.

The March Australian Dollar settled today (Friday) at .86.10.

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The following article is from www.forextraders.com 

How high can gold rise?

As gold keeps breaking new records, and excited traders speculate on the difficult future facing the U.S. currency based on technical indicators, the fundamental factors behind the trend remain clear. Increased worries about the solidness of U.S. public finances, the lack of any serious government plan to resolve long-standing issues related to the future of the social security system, eroding credibility of the U.S. motto about a strong dollar, and the general weakness in the fundamentals of the global economy ensure that the gold-dollar trend is likely to remain firmly pointed to higher peaks for the foreseeable future.

Traders would prefer to get rid of dollars in as large quantities as possible, but the lack of any meaningful substitute means that market participants always hold more of the U.S. currency than what is deemed to be prudent. Yet at the same time, neither Japan, the European Union, or China show any willingness to create a new alternative to the U.S. currency by encouraging the appreciation of their national currencies, and given the enormous imbalances that sustain the dollar’s status as the global currency, it is hard to imagine it being replaced by the Euro, or the Yuan without a period of rebalancing through depreciation. But as the global trends favor weaker currencies in all these nations, it is hard to see how the USD can be dethroned by any of the favorite candidates.

Purchasing gold, on the other hand, offers a fine solution to this Gordian Knot by lumping them on the same side, into the basket of worthlessness, and placing gold on the other side, as a store of value that thrives when uncertainty, insecurity, and fear rule the global economy. And, when we recall the never ending speculations about the dollar’s demise, it is only natural that the metal will find attention regardless of the price tag, until a bubble develops, and a long term downtrend is established. We are apparently very far from that turning point, however.

Gold has some powerful dynamics behind its rise, and it doesn’t seem outlandish to imagine a target of 3000-4000 in the next five years, if, as anticipated, economic activity goes to a second dip once the impact of government stimulation and private speculation and bubble-building lose their dominant effects in the markets. We are firmly of the opinion that dollar will remain the global currency in at least the next decade, even if it depreciates somewhat further before regaining its value. It is very hard to imagine Europe replacing the United States as the economic superpower of the world, that potential is only possessed by China. And China is of course light years away from becoming a finance center, with its extremely backward legal system, shallow but highly volatile and unpredictable markets, and financial system at the stage of infancy. The forex market will go through the rest of this decade in a state of agitation, no doubt, but it may well turn out to be “sound and fury”, when we are able to reconsider everything with hindsight.