Since the beginning of the year the price of gold has been very volatile bouncing between £910 and £870 per ounce without any clear direction or reason for the volatility. This reflects the current market environment quite well as governments are trying to convince investors that they are on top of the situation but the data released by the independent market researchers tells something totally different.
Portugal, Spain and Italy were pretty successful in their bond auction yesterday and managed to get the money they wanted but this amount is not even close to the figures they actually need. Ireland received a 90bn Euro rescue package last month and Spain gathered 3bn Euros from the auction. Spain’s economy is six times the size of Ireland so 3bn Euros is nothing when thinking about the actual figure the country needs.
Presently everyone is focused on Europe and how the Euro is going survive but an even bigger issue is the U.S. The country’s debt levels are even higher than the Euro zone countries and as the economic power is shifting to East, the U.S will struggle to assure other countries that it can pay back its debts. Large eastern economies, such as Russia and China, are constantly reducing their Dollar reserves as they don’t believe that it will regain its reserve currency status anytime soon if ever.
As they are selling their Dollars and there is no other reliable reserve currency available, the safe option is to invest in gold. Both China and Russia are absorbing almost their whole domestic production themselves leaving the markets clueless about the actual size of their gold reserves. This way they can buy gold without interrupting open markets and keep the actual reserve size in secret.
There have been rumours that China and Russia have started to trade in their national currencies instead of Dollars, if this is true it will be a major setback for the Dollar’s recovery. Both countries are major players in the oil business and the Dollar has traditionally been the only currency used in oil trading.
The seasonal demand for gold bullion is likely to stay strong up until March as Chinese people are rather keen to buy gold as a New Year’s gift. After March the demand traditionally quietens down for the summer but in the last few years it has continued to be strong because of the issues in global economy.
Most gold experts are anticipating big and fast moves up and down in the gold price as more and more people are getting interested in investing in gold and entering the markets. China is likely to become the biggest gold importer within few years as its economy is growing faster than India’s and the Chinese government is encouraging people to buy gold bars and coins. The issues in western economies will dominate the price fluctuations but in the background the eastern traders will buy on every price drop and this way a major dip in the price in unlikely as long as the current global problems remain unsolved.
