Just when it looked like gold prices were going to turn bearish again, stocks started to tank, Putin turned up the heat in Ukraine and the World Gold Council said Chinese demand for gold was poised to start growing again. Those factors — among others — led the SPDR Gold Shares (GLD) to a 0.5% gain last week, while gold futures advanced from a low of $1,268.40 per ounce to a weekly close of $1,300.80.
As one could guess, the gold permabulls used the modest uptick as a platform to pound the table on the world’s most popular metal. Are gold prices really back in the bullish mode they were in at the beginning of the year, however, when gold pushed off its late-December lows to climb 15% before topping out in mid-March?
Truth be told, it’s still on the fence. The good news is, the bullish and bearish drivers for the price of gold are pretty clear.
What’s Working for Gold
With all due respect to the World Gold Council, China can ramp up its gold demand till the cows come home — it won’t offset the plunge in demand from every other arena. Namely, central banks are still net buyers, but have scaled back their purchases from a peak of 163 tonnes in the second quarter of 2012 to a mere 61 tonnes last quarter. And, for the fourth quarter in a row, ETFs were net sellers of gold, to the tune of 180 tonnes in the fourth quarter of 2013, and a total net-sale of 881 tonnes of gold for all of last year.
Still, raw consumption (buying) isn’t the only factor that pushes gold prices.
Also in play is the fact that Treasury yields remain stuck at weak levels, and the U.S. dollar remains suppressed due to a myriad of ongoing geopolitical pressures.
Specifically, yields on the 10-year Treasury never hurdled the key ceiling at 2.8% after several attempts over the first four months of the year, while the U.S. Dollar Index continues to drift lower in admittedly erratic fashion, putting pressure on a key support level around 79.25. If the U.S. Dollar Index breaks below 79.25 and/or the yield on 10-year treasury bonds moves below a floor at 26.00 (and it looks like that’s what’s in the cards), that might well be enough to hurl gold futures and the GLD to higher highs … and back into an uptrend.
Of course, as long as the crisis in the Ukraine remains in motion, investors also will seek safe havens, with gold being at the top of the list. And the abduction of a handful of observers from the Organization for the Security and Cooperation in Europe on Friday is almost sure to elevate Ukrainian tensions.
What’s Working Against Gold Prices
While the price of gold might be hitting headwinds on some fronts, it’s the beneficiary of tailwinds on other fronts.
The biggie is the fact that the U.S. economy is still on the mend, resulting in a stock market that’s seemingly rewarding enough to choose it over gold. Last week, for instance, orders for durable goods jumped 2.6% including transportation orders, and were even up 2% ex-transports.
That’s not the only reason the gold outlook may turning bearish, however.
The Michigan Sentiment Index rose from 80 in March to 84.1 for April as well. The annualized inflation rate was still a paltry 1.51% as of March. And, even with Friday’s pullback for stocks, the market remains within reach of breaking to new all-time highs.
Throw in the fact that actual overall gold consumption has fallen for four straight quarters — a detail the World Gold Council didn’t underscore when touting a projected increase in demand from China — and is unlikely to meaningfully reverse that trend when Q1’s demand numbers are revealed in mid-May, and it’s not like investors need a safe haven.