Last week saw gold hit new highs early in the week and I speculated that fear was driving the market and prices would correct when the debt deal for Greece was announced. As last week went on I had to back-track on that position as gold not only held higher ground but managed small advances.
Looking again at the technicals, I still think gold and silver are over-bought at these levels, but not wildly so. In yesterday’s Kitco gold survey analysts were similarly divided with eight seeing prices up next week to 11 saying prices would move lower.
Price support for gold comes from continued demand in Europe in spite of the deal announced on Thursday by European finance ministers. The Euro-zone debt deal is not doing much to calm investor fears or bolster faith in the euro.
Another contributing factor to gold’s advance and price stability is continued strong demand from Asian markets, particularly India and China.
The debt crisis in Europe was amplified by a breakdown in the debt ceiling negotiations in Congress. Markets are now seriously considering previously unthinkable that the United States of America could be forced into self-inflicted default. That possibility didn’t really hit home for most until Friday afternoon when Republican leadership walked out of negotiations on the debt deal. Another meeting on Saturday broke up after just an hour.
Failure to reach a consensus on raising the debt ceiling could have a significant impact on gold prices next week and is one of the reasons analysts are having such a hard time picking a direction. Even if Congress limps to a budget deal, demand is still healthy and the correction could be minimal.
If a deal is not reached this weekend, precious metals prices could well see a surge to higher levels. Markets don’t wait for deadlines, they price contingencies early and often irrationally. With no debt deal by Monday, expect the equities markets to react badly.
From here I see more potential to the up side, with the caveat that a debt deal that doesn’t hobble the economy could knock the props out out of gold prices.
Corrections from profit-taking are equally plausible, but that didn’t take hold when prices surged last week. There were minor down-side corrections, almost certainly attributed to profit-taking, but prices recovered each time.
We’re likely to see gold prices trade in a narrow range until news breaks and markets gain confidence in one direction or the other.
All the same, if you have a short-term need for cash anyway, this might not be a bad time to sell off some of your gold and silver holdings. Be prepared to move back in if the market corrects.
Looking down the road, as long as the Fed continues their easy money policies, as long as Wall Street is allowed to continue gambling our collective treasure in the derivatives markets with little in the way of oversight, then the boom and bust cycles we’ve experienced lately are going to continue. In that environment gold will continue to shine in your portfolio.
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