Gold showing some life – briefly?

Gold showing some life – briefly? This is the week of the US election and if market trends are going to change – or perhaps speed up and extend current trends – this is likely to happen from Wednesday onwards as Americans digest the outcome of the election.

The job of president is not on the line during these so-called mid-term elections; only a third of the senate and half of the house of representatives are up for election. However, as the balance of power the two parties in both houses is evenly divided, the outcome is going to of great importance to US politics and Bush’s ability to execute his plans. With the Republicans being viewed as friendly to business, a clear Republican majority will be seen as positive for Wall Street, apart from strengthening the president’s hand.

Should voters turn to the Democrats in order to register disapproval of the president’s plan for war on Iraq, thus to provide the Democrats with a clear majority in both houses, investors would probably be less optimistic and first wait to see what kind of tug of war develops between the White House and Congress and what bargaining chips Bush will place on the table for continued support for his war effort.

Indirectly – or perhaps even somewhat directly – what happens on Tuesday in America is also likely to influence the behaviour of gold over the next few days and months.

In the mean time, Gold has not done too poorly over the past 10 days or so, although there are already indications that the almost to be expected backlash is taking place.

On Thursday, 24 October, the gold price took off from a near triple bottom along $310 to rise steadily until on Friday the price broke above 4320 and briefly above $310. This was almost too good to be true and sustained selling of futures and bullion soon had the price back to just below $320 for the close of the week’s trading.

This Monday, gold remained under pressure during early trade and slid back to around $317 – still looking good in terms of the price range two weeks ago, but sadly lacking the excitement that was evident on Friday when the price successfully tested resistance at the $320 level, but then failed to hold onto the break higher.

News of good physical demand continues to arrive and in the final resort this is what will make or break the gold market. When physical demand can no longer be adequately met from stockpiles, the price will begin to react consistently upwards, irrespective of what is being done on the futures markets in an attempt to block the trend. So far most of the physical demand seems to come from the east – with Asian and mid-eastern investors very prominent in the sustained buying.

Yet there are also consistent talk of major hedge funds accumulating both gold and gold related long positions. It is said that this is being done in anticipation of a major break in the gold price when demand outstrips the ability of whoever is working to keep a lid on the gold price – with good success so far, but perhaps not for long. And almost certainly not indefinitely.

At the same time the rand has started a good bull run, breaking clear below the R10,00 level to add to the woes of the gold mines. They are paid in terms of the rand price of gold and a strong rand reduced their gross income at the same time as what inflation adds to their costs. The gold price therefore has to start moving to keep up the momentum as far as mine earnings are concerned, at least while the rand remains so strong against the US currency.

One good thing about the rising and falling trends in this 5 month long mainly sideways market is that people who have traded the gold activity – with the knowledge that the 4325 level would offer firm resistance – could have made a good deal of profit. Since the high of late May, the Gold Index has by late July fallen by 40%, then bounced by 56% to a lower high in mid September and then fell again by 26%. The Index is now in another rising trend, but it is still too early to say what will happen.

Hopefully traders are already positioned to take advantage of any new surge in the prices of gold shares.