Turning Point Of Gold: Remain Bullish

January has been a tough month for gold. From its year-end 2010 price of $1,420 an ounce to its recent low just over $1,320, gold has lost some $100 - about seven percent.

On Wednesday, the World Gold Council published its annual Gold Investment Digest for the fourth quarter and full-year 2010 with some interesting insights.

According to the World Gold Council last year’s price performance was driven by developments in key gold markets:

• China saw increased investment activity, driven in part by innovative new gold investment vehicles offering improved access to the gold market.
• Jewelry consumption rebounded in India, the world’s largest gold market.
• Globally, investors remained concerned about uncertainty in the macro-economic environment and turned to gold to hedge against weakness in the US dollar and rising inflation in many economies.

We find the last point particularly interesting, as the USD Index finished the year slightly higher than was the case in 2009. However as we have observed, after 2006 things are much more complicated than simply USD up = gold down and vice-versa.

For the past two weeks we have experienced the risks that we might all face in 2011 and mentioned the problems caused by rising food prices and the social unrest they might unleash. We didn’t expect it to happen so soon.

After Tunisia’s revolution and the ouster of its president after 23 years of rule, Egypt seems to be next on the North African crisis list. One of the main grievances of the protesters in Egypt, just as it has been in Tunisia, has been the soaring price of food in the shops. The crisis and food shortages may spread to other Arab countries and no one knows where that can lead. We only know one thing—in times of crisis and uncertainty, people turn to gold for a safe haven.

The sentiment for the USD Index is short-term bullish which also has bullish implications for gold and silver. Recall that during the past few months, the USD has been leading the precious metals and here could very well ignite a turnaround for the metals.

In this daily short-term chart, we see that once again a cyclical turning point has come into play Summing up, gold appears bullish in the short-term; however the sentiment for the medium-term is mixed. Much depends on how the resistance levels hold the next short-term rally. If they hold and stop the uptrend, then it may very well be prudent to exit a portion of one's long-term positions.

Where will price of gold move in 2011 BY MANSUKH JANUARY 2011

There is no definitive answer to where the price of gold will be in 2011. The best an investor can do is to look at possibilities based on historical data. If an investor assumes that paper currency will continue its debasing trend, what would be a high estimate on gold prices per ounce? To answer that we need to look for the highest that gold has been in the past.

Indians were on a spending spree last year. But those who shopped for gold have reason to be satisfied with their purchase gold price has seen a 26 per cent rally this year! In rupee terms, gold prices have shot up by Rs 400/gram (Standard 24 carat gold), a 22 per cent run up. In contrast, stocks weren't a better play the benchmark Sensex is up just 15 per cent year-to-date.

January 21st, 1980 saw the price of gold reach 850 US dollars per ounce. To understand how much money this is worth today one would need to adjust the figures according to the Consumer Price Index. 850 dollars in 1980 is worth 2,250 US dollars in the year 2010. If gold were to repeat the value of a previous high it could double from the price it is trading at in December of 2010.

Other situation suggest that because the current economic output is many times greater than 30 years ago, the peak price of gold could even reach 3000 to 4000 dollars per ounce in the years to come. On the other hand the argument could be made that markets are based on mass psychology and trader emotions. Some might suggest that the average person would not believe that the price of gold could ever reach up to 3,000 dollars, thus creating a resistance to that level ever being achieved.

However some market participants believe that as the market recovers in 2011 and beyond, the price of gold will retreat dramatically as the economic woe gets pushed to the backs of people's minds and their hedging tactics are tossed aside. Longer term, the market could face headwinds that come with a sustained economic recovery as global interest rates could rise, denting the appeal of gold, a non-yield bearing asset. “The market is expected to derive strength from further economic pitfalls and the near-zero interest rates maintained by the US Federal Reserve.

There are many other reasons for gold's out performance this year. One, the change in the gold-dollar relationship. While investors have traditionally bought gold when the dollar weakened, this year was different. They bought the dollar and gold simultaneously as the euro weakened. Two, strong revival in jewellery demand after the recession induced dip last year. Three, growing investment demand for the metal from emerging and also developed nations as returns from other options dwindled. Further, gold fundamentals were supported by the lack of significant increase in mine outputs during the year and a fall in scrap gold sales. With global economies still in the grip of uncertainty, gold continues to present a case for investment. The demand for gold has been traditionally driven by jewellery consumption. But that seems to be changing with investment demand for gold now driven by a range of products such as Gold Exchange Traded Funds.

some of these deals happening quite recently, there may be potential for further value unlocking in gold stocks. But before you choose mining funds over plainer options like gold ETFs do note that they are high risk bets they are more volatile than gold and also tend to under perform physical gold during a downturn. While most of the arguments presented here may well hold good in the coming year too, possible increases in interest rates that will make bond yields attractive, are a risk. Resurfacing concerns over another wave of recessionary conditions should keep investment demand for gold firm, as investors look to hedge against financial market volatility and vulnerability.