Whither gold now ?

As gold approaches $1100 I wouldn’t be surprised to see some liquidation occurring as some traders close their current long positions and take profits. This may result in a slight pull-back, but does not mean that this move has peaked. In fact this is only the beginning of the next upwards phase.

During the week the US Federal Reserve stated that it was going to leave rates unchanged at 0-0.25% and that they intended to keep it low for 'an extended period'. And, the unemployment figures released on Friday showed a sharp increase in the unemployment figure to a 26 year low of 10.2%. The US non-farm payroll contracted more than expected by -190k in October. Almost minutes after the figures released gold vacillated widely between $1097 and $1090.

The ECB left the main refinancing rate unchanged at 1% in November and the BOE kept their rate at 0.5%.

The news attracted my attention was the announcement that the Reserve Bank of India has purchased 200 tons of the 403.3 tons from the IMF. Once again we see buying and not selling from one of the central banks. It is now believed that China may be the next to buy gold from the IMF. Earlier this year Chinese officials stated that they had been buying gold since 2003 and that now, they own some thirty times more gold than they did in 1990. While some US$1.6 trillion of their US$2.3 trillion of reserves are denominated in US dollars, from the statements made by the Chinese government over the last few months, we can assume that they have plans to reduce these dollar holdings and invest more in the precious metals.

As I have been repeatedly stating in my articles, this current bull market in gold is not about jewellery, but is about the value of paper money in particular the US dollar. And, one of the ways to protect your wealth in such times is to own gold. And, it is for this reason it is imperative for investors to diversify and allocate a portion of their capital to the precious metals gold and silver.

The question that some people are now asking is, “Is it too late to enter into this market?” And, my reply is, “absolutely not, especially if you are taking a view over the next five years.” If my analysis proves to be correct, I am looking for the price of the precious metal to hit US$1300 – US$1500 during the course of 2010. Thereafter, it will continue much higher.

However, if you are a trader looking for short-term moves, it may be prudent to stand aside at current levels waiting to go long on the major dip.