Gold rally runs out of steam

The Persian Gulf crisis this summer had an immediate, positive effect on the world’s gold and oil markets, but of late the Iraqi invasion of Kuwait could be said to have added only to the trading volatility. Gold, which approached US$415 per oz. in London, and oil, which topped US$30 per barrel in New York, both saw their runups halted. Gold was the harder hit; at presstime, the price of the precious metal in London stood at US$383.30. (Oil, trading below US$26 a few days previously, staged a turnaround and had jumped to above US$29 at presstime.)

War, or the threat of hostilities, has traditionally sent the gold price upwards as investors seek a safe haven for their money. At least a couple of analysts continue to see gold as a possible buy, despite the quieter times in the Gulf.

Advising investors to “hedge their positions in part with gold” is The Bank Credit Analyst, a monthly publication from Montreal.

The Analyst says during the 1970s, the gold price moved in tandem with oil, often leading it. An ounce of gold at that time was worth 10-55 barrels of oil, says the publication, suggesting we are in another decade where gold and oil will have a close relationship. It takes at present about 14 barrels of oil to buy one ounce of gold.

Gold is currently considered inexpensive by the Analyst. “Once a full-scale recession develops and the Fed (or U.S. government) begins to add liquidity more aggressively, the underlying fundamentals will become more bullish,” the Analyst says. “Hence, we believe that price weakness should be used to build long-term defensive insurance positions in portfolios.”

The Analyst considers the summer rally in the gold price to be over. In the near future, it sees the precious metal trading below US$400 “barring a prolonged war in the Middle East or a collapse in the dollar.”

Securities dealer Barclays de Zoete Wedd of London comments in a recent newsletter that an oil price of US$27 is not high enough to cause real interest rates to decline. “Gold’s only basis for strength outside of a Gulf conflict is an ongoing weak (U.S.) dollar trend, but this will not impress the Japanese, Swiss or Germans, who will not see the benefit in the gold price in their own currencies,” write the firm’s analysts.

Barclays cautions that the Gulf crisis has yet to be resolved. “Technically, gold remains in a bull trend, with the current price still trading above the 200-day moving average and with the 200- and 100-day moving averages having turned up recently. It may be a cheap buying opportunity,” it says.

Gold-price forecaster Martin Murenbeeld of Victoria, B.C., in his latest weekly newsletter, joins with other commentators in acknowledging that a resolution to the Middle East crisis, either by diplomatic or military means, will take time.

“Note also that the markets have now digested the possibility of a shooting war,” he writes. “There may actually have to be some shots fired before gold will again respond strongly to this crisis.”

Murenbeeld sees gold trading mostly sideways during the next several weeks, and possibly downward if the U.S. dollar rebounds.