The Future For Gold – Reflections for 2007 | Investment Guide|Gold Investment Expert

Some analysts have been on record as linking the price of gold with the price of oil.

The thinking is that as the price of oil goes up so does the appeal of gold as a hedge against inflation.

As a rider it would therefore be logical to expect the price of gold to go down in tandem with oil on the assumption that oil price movements have a direct and immediate effect on inflation.

The fact is that there are so many other worldwide influences on the gold price that it could almost be considered a rarity if the prices of both move together at the same time and in the same direction.

A look at the 2006 charts of both will bear this out.

Seasonal purchases of gold for jewelry manufacture have a direct bearing on gold price movements.

The people of India, Turkey, China and other Eastern countries have a tradition of giving gold jewelery as wedding gifts and for other celebrations.

The ownership of gold is an indication of a families´ status in the community and is considered to be the ultimate store of value.

There are indications that loss of confidence in some paper currencies, with the US$ in the forefront, is growing.

There have been reports that China has been increasing its gold reserves at the expense of so far only a fraction of its huge US$ holdings.

Oil producers are also moving away from the US$ and into Euro and Sterling but both these economies, particularly the UK, are looking increasingly fragile in the shorter term.

The next stop for the oil producers could well be gold.

With no sign of the hostilities in Iraq and Afghanistan coming to an end and tensions rising in Iran, Syria and North Korea, the prospects for a peaceful 2007 are remote.

At times of international tension the demand for gold as a safe haven asset has always increased.

A worldwide economic slowdown is underway and we would not like to make any comment on its duration or severity.

Equally it is possible that the emerging nations, particularly China and India, together with Russia which is now a dominant player in oil and minerals, may be able to sustain their rapid growth and prosperity through their own domestic demand and become less dependant upon trade with the developed West.

A worldwide slowdown will diminish the demand for many commodities, including precious metals, possibly including gold.

On the other hand if Russia, China, and India can keep their economies growing through domestic demand, and after all it is from a very low base compared to the West, then commodities in general could well be the only bull market around for a while! Factoring in gold into these scenarios becomes exceptionally difficult but getting it right could be very profitable.

Supply and Demand. At present the demand for gold is greater than annual production.

There are also estimates that worldwide reserves are becoming scarcer, harder to find and more expensive to mine.

The Future For Gold – Reflections for 2007 Because of the length of time it takes from successful exploration and then development to the producing stage, and the added risk that by the time the metal is out of the ground the price may have tanked to the extent that extracting it is no longer economically viable, the major gold producing companies are looking elsewhere.

Junior miners with good management and promising exploration rights, particularly those nearing production are becoming targets for the seniors.

These junior miners are virtually without exception needing capital to further their activities so it becomes a faster, surer route for the cash rich majors to participate in the development of a promising junior mining company.

A further problem is that many promising gold mining sites are under the scrutiny of activists who object to the damage to the environment that is caused by the use of cyanide ponds where necessary in the process for extracting gold from ore.

Keep an eye open for junior miners with experienced management and where a senior has taken a financial interest. This is the most profitable, best leveraged and highest risk play in the precious metal market place.

Hedge fund activity. The consequences of shorting or going long on gold by hedge funds is, as in any other active commodity market, a problem to evaluate.

Generally speaking hedge funds managers nearly all follow the same criteria when deciding upon their position in the market so with this group likely to act in concert, the effect on the gold price can be dramatic in the short term.

There are bigger players in the commodity and currency markets, known as ´big dogs´ that is governments, banks, institutions and the like, that can bring some stability to the market but investing in gold can be a volatile ride.

Conclusion

This writer remains bullish for gold in 2007 and expects the price to exceed US$1000.00 an ounce at some time before the end of the year despite believing that the odds are in favor of a recession in the West.

However it is also on the cards that the US dollar is going to depreciate considerably against other currencies, with the Euro probably gaining the most of all the leading currencies.

In which case the rise in price in dollar terms will act as a hedge against the devaluing currency rather than producing a high profit in real terms.

Great care and consideration of the economic factors should be used when investing with currencies other than the dollar in the volatile gold market.