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Gold price fundamentals remain sound

The link between the gold price and the strength of the US dollar has been clearly illustrated in the last few days.

Last week gold moved sharply upwards as the dollar fell, but the dollar has since gained some strength and the gold price has passed down through the $800 mark. Analysts are suggesting that if the dollar maintains its current position, or rallies further, gold could return to the mid to high $700s, until the situation changes. Equally, if the dollar loses value against the major currencies, the gold price will almost certainly rise, possibly achieving its $850 all time high in the short-term. Economists are expecting the Federal Reserve to reduce US interest rates by a further quarter point before the end of the year. Such a move would bode well for gold, as the value of the dollar would almost certainly fall.

However, other economies may also consider reducing interest rates to compensate for the fact that their US bound exports are less competitive. Overall, gold price fundamentals remain good and dollar fundamentals remain weak so that the medium-term outlook for the gold price is positive. Turning to the supply of gold, production worldwide is flat, and possibly falling. The credit squeeze is having an impact on marginal or risky projects and companies are struggling to rise development funding. Only this week, NovaGold Resources announced the suspension of construction activities at the Galore Creek copper-gold-silver project in north-western British Columbia. In addition, there is speculation that Central Banks are selling less gold and that some banks are actively buying. (metalmarkets.org.uk)