Precious metals have always been intriguing to investors because they tend to hold their value. In times of geopolitical crisis or currency devaluation, for example, the value of paper money might fluctuate, but a hard asset will always be worth something. As a result, historically, precious metals have been considered a “safe haven” in times of economic and financial instability.

That brings us to why gold is on a tear today. It declined in 2008 and early 2009 as panicked investors rushed into cash in an attempt to weather the financial crisis. But sometime in the middle on 2009, when investors began to move their money from the sidelines, gold started to rally. It returned 32.59% through the third quarter of 2009, vs. 19.26% for stocks.

The question is, where can we expect gold to go from here? In order to predict whether gold prices will skyrocket or come crashing down, it’s important to understand the principal factors that affect the price of any commodity: supply and demand.

The supply side of the equation is not particularly relevant in regard to gold because gold supplies remain fairly constant. That’s because production has not significantly increased due to a lack of new mining sites. Should supplies increase, however, investors may want to be cautious.

The demand side of the equation, then, is the one gold investors must look at. And as we noted above, demand for gold tends to increase when investors have a lack of confidence in the U.S. economy and financial markets.

That’s certainly the case today. In fact, we see two factors, that could lead gold to outperform in the near future: inflation and currency devaluation. In response to the financial crisis of 2008 and 2009, the Federal Reserve injected massive amounts of liquidity into the money markets. Ultimately, that increase in the money supply could devalue the U.S. dollar and lead to inflation. In fact, the U.S. dollar is already shockingly low. On October 14, 2009, it fell to a 14-month low against the euro, hitting $1.4947, the weakest since August 2008, according to Bloomberg. And while inflation is not yet a problem, economists are on the lookout for it.

These conditions led Standard & Poor’s (S&P) to raise its gold price assumption for 2010 from $750 per ounce to $800 per ounce. “Investors seeking a hedge against inflation risks and uncertainty in the financial markets continue to support gold prices,” the S&P analysts write. “The metal’s properties as a safe haven, and to a lesser extent the demand for jewelry, also support its longer-term price prospects.”

S&P’s estimate, however, may be on the low side. As of November 2009, gold was trading at more than $1,000 per ounce. And since gold exceeded $1,000 per ounce level, the price has been extremely resilient, with no meaningful pullback seen. There have been periods of profit-taking, but increased demand quickly appears on any weakness in price.

In sum, then, good old-fashioned gold fever is back—and investors who are looking for a promising trend may want to consider investing in it and other precious metals.

But don’t consider gold an investment only for troubled times. One of the greatest advantages of precious metals exists regardless of economic and market conditions. Precious metals tend to perform differently from other assets. As a result, investing in precious metals may be a good diversification strategy for a portfolio comprised mainly of stocks, bonds and real estate—in all environments.

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Spot gold was bid at $925.20 by 1520 GMT after hitting an intra-day low of $922.60, the lowest since June 24. Earlier it hit a high of $944.70.

The precious metal reversed earlier gains when the dollar, which has been under pressure, gained against a basket of currencies after U.S. consumer confidence data.

“Obviously, in these days where everything is linked together, from crude prices to the price of gold, any change to people’s view of the economy and inflation expectations will cause a reaction,” said Ole Hansen, an analyst at Standard Bank.

Adding to the bearish signals for gold prices, crude oil dropped nearly 3 percent.

While investing in gold is usually seen as a hedge against risk, a strengthening dollar makes it relatively more expensive for holders of foreign currencies, weakening its appeal.

“Gold is following the dollar,” said senior trader Michael Kempinski at Commerzbank. “Euro/dollar falling below $1.41 triggered some profit-taking in gold,” he said.

Earlier in the London session, gold slipped after the European Central Bank said gold and gold receivables held by euro zone central banks fell by 96 million euros ($136 million) in the week ending June 26.

INFLATION IN FOCUS?

Matthew Turner, an analyst at VM Group, said gold investors seemed to be focusing more intently on long-term inflation expectations than recession fears, which would strengthen the link between crude and bullion prices.

“But there are no immediate signs of inflation anywhere for now, so investors are looking to the long term, and of course when inflation does start to go up, the price of gold will be rising well ahead of it,” he said.

U.S. gold futures for August delivery dropped by 1.5 percent to $926.90 per ounce on the day.

On the investment front, the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings remained at 1,125.74 tonnes as of June 29, unchanged since June 25.

In other precious metals, spot silver was lower at $13.52 against $13.84 on Monday, platinum was unchanged at $247.00.

LONDON, June 30 (Reuters)

It is an interesting time for gold investors. On one hand, gold prices should be soaring as investors flee to the precious metal for security. On the other, gold’s value should be dropping precipitously as deflationary concerns gain momentum.

It is no wonder gold prices remain horizontal and the gold hedge I recently created is paying profits. Last week we cashed in for gains of up to 50%.

Some interesting reports released today will help illustrate why gold prices are acting the way they are.

First, let’s look at the demand side of the equation. Global orders for gold increased by over 120% during the third quarter on a year-over-year basis. Retail investors moved 232 tons of the metal, compared to 105 tons this time last year.

Exchange-traded funds (ETFs) significantly boosted their physical possession of gold over the past three months. Third-quarter holdings increased by 150 tons. During the second quarter of the year, they only added 4 tons of gold.

These figures are proof that global demand is soaring. But why are prices staying flat and showing signs of a serious collapse?

They want it, but we don’t

There are two answers.  For the first, we have to look at the situation here in the States. During the previous quarter, Americans demanded 20% less gold than the same period a year ago. Thanks to a strengthening dollar, American investors are shying away from gold as it typically moves inversely to the greenback.

Remember, gold is a vehicle used to protect against inflation. Right now, the American economy is anything but inflationary. The headline reading of the latest producer price index, released yesterday, showed a record 2.8% decline in wholesale prices last month. Today’s consumer index confirms the deflationary environment with a negative reading of one percent.

Deflating prices will be a major drag on gold’s appreciation. Enough American investors will be dumping their gold holdings in exchange for stronger assets to nearly offset the significant increase in global demand.

If a deflating economy is not enough to drag gold valuations down, the fact that institutional investors are abandoning the metal certainly will. The world’s largest funds unloaded 300 tons of gold recently. As they are forced to meet margin calls or as their investors cash out, institutional investors are unloading their gold holdings as the metal is liquid and, compared to their other holdings, has held much of its value.

By reviewing this information, it is easy to see why gold prices have made relatively little moves over the past three months. When prices get pulled in both directions, they tend to stay put.

Something’s gotta give

Eventually one of the forces will give and gold valuations will make a significant move. If the break is caused by a slowdown in global demand thanks to signs of economic recovery, gold prices will plunge. If it institutional sellers stop unloading while global demand is at record levels, prices will soar.

History and basic economic principles point towards falling prices so I am naturally bearish on gold’s long-term valuation. But there are plenty of folks that tell me I am wrong. As the world economy tanks and the U.S. floods the market with its currency, they say, gold price will soar.

Never one to invest unprotected, I created a hedge play that will profit no matter which way valuations move over the next year. If I am right, the bearish leg of the hedge will win. (Last week we proved my theory by cashing in gains of over 50%). And if I am wrong, the bullish side will win. No matter what, the hedge is designed to pay out profits.

If you want to learn about this unique hedge, click here.

This is an interesting time for investors. Never before have so many unique, yet infinitely strong forces, tugged at the market.

As we slowly weigh and understand all of the variables, the economic future will become clear. But for now, it is prudent to take protection and seek shelter in the opportunities that have historically provided profitable recessionary havens.

Source: The gold dichotomy: Demand rises, prices fall

Tbilisi, Georgia

It was soul singer Edwin Starr who asked (and answered) the following rhetorical poser: “War. What is it good for?”

Starr’s conclusion was that war is good for “absolutely nothing”.If events of the past week are anything to go buy, the price of gold can be included in the all-encompassing “absolutely nothing” category. It continued to slide as Russian tanks rolled into South Ossetia, and kept going after President Medvedev called a halt to military action.

I’ve been observing events — both the war and the action on the gold market — from Tbilisi, the Georgian capital.

As the Russians advanced, frightened Georgian women were taking comfort from their jewellery boxes.

Georgians prefer the dollar to gold

No one, however, has been adding to this store of realisable wealth. Rather, the dollar is back in favour as the safe haven asset of choice. First wallets are being stuffed full with local currency to fill the car with petrol, stockpile food and for airfares (when the airport reopens). Then dollars are being stashed away for future needs.

In 2008, gold in any quantity is just too cumbersome. It is also too expensive. And too volatile! Ask any woman in Georgia’s capital, Tbilisi. First the price shot up. Now it seems to be falling at the rate of knots. This doesn’t exactly inspire confidence…

That’s why their husbands are locking dollars — and not gold — in their safe boxes.

Demand, both from jewellers and investors, has taken a hit

Outside this crisis region, where ready cash is less of a priority, others too are shunning gold. India, a gold mega consumer, has seen a heavy fall in buying. The latest World Gold Council figures show that jewellery and investment demand there dropped by a whopping 45% between April and June. Demand also fell in the other traditionally heavy gold buying areas of Turkey and the Middle East.

For weeks, Asia’s traders had been warning that the price volatility was bad for business. The price has, after all, tumbled from over $1,000 earlier in the year down to less than $800 an ounce.

Western jewellery buying has, says the World Gold Council, also fallen. This time because of threatening recession. “Deteriorating conditions in across many economies …. acted as a further barrier to spending on gold jewellery,” its latest quarterly report says.

The speculators are running scared too!

Even speculators seem to be abandoning gold (along with other commodities) amidst the dollar’s resurgence. “The speculative element is coming off,” admitted Jill Leyland, economic advisor at the Council’s London office. Hardly surprising when the Central Banks had been talking widely of selling gold to help the dollar…

In their current pessimistic frame of mind, gold bugs also fear a rise in gold output. This is despite the fact that output actually fell by 4% in the last quarter. Australia, South Africa and Indonesia all saw lower production.

More volatility ahead

Gold’s price volatility is expected to continue. Why, after all, should it be any different to all the other markets which are wildly swinging around?

Barclays Capital’s precious metals analyst, Suki Cooper, puts the price range for the rest of this year and 2009 at $800-900.

The scaremongers are not yet predicting the big doom scenarios — a collapse to 2007’s $600 an ounce, or even 1999’s $250. But investors remember those levels. They know how bad it could get…

One thing we can be sure of — it’ll be a bumpy ride. Keep your courage!

Erin Hamilton

Source: Why Gold Investors Are In For A Bumpy Ride

Gold is following a normal bull-market pattern. It runs higher and higher until it gets too popular and too “tired.” Then it corrects, shakes out the weak momentum traders, and plays possum for a while. After gold’s huge run-up in the first few months of this year, we’re due for one of those “possum periods.”

We stand by what we said near the March peak: Gold could correct all the way down to $750 and still remain in its bull trend. If it does actually hit $750 soon, we won’t be able to rush checks to our coin dealer fast enough.