Wednesday, August 24, 2011

3 Factors Driving Gold (and When They Might End).



There is no disputing that gold is hot these days, but why? What's caused the meteoric rise in the price of gold in recent years, and will it end soon?

According to Rich Ilczyszyn, MF Global's Senior Market Strategist, the 3 things driving demand for gold are:

  1. The European debt crisis.
  2. Federal reserve policy.
  3. Bull market fever.

Regarding the flight to safety, Ilczyszyn says:

"Gold isn't a safe haven, it's a currency. In other words, as far as gold bulls are concerned, gold is anti-everything collapsing in the Western world."

When this will end is anybody's guess, but I would think that a sign from Washington D.C. that they were getting serious about America's debt crisis might be a turning point. If the dollar suddenly gained strength and the U.S. financial house were on the road to order there would again be a competing currency to gold. Eventually this would weaken the sentiment that gold is the only viable currency of the future.

The federal reserve announced that they will be keeping rates at record lows until at least 2013. This gives gold investors an usual sense of timing on when they might expect treasuries to become a viable investment again. Of course, the fed can always change their mind and raise rates earlier than their stated time frame.

Bull market fever is obviously at play here as well since the recent increase in margin requirements by the CME didn't cause so much as a hiccup in the price of gold. This is unusual and unexpected and may be an indication that the global gold trade is so big that the CME margin hike can't affect it.

Gold is trading at 20% above major trend support and is an increasingly volatile market, so investors and speculators alike should tread lightly on any moves as we are in somewhat uncharted territory.

Here's an interview with Ilczyszyn in which he details some of his thoughts on this topic:

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