Two Views On Gold

Naturally, they conflict. A Financial Post article has both a bearish and bullish case for gold: the former focuses on diminished investment demand for the metal.

Brockhouse Cooper strategist Pierre Lapointe warned that the financial demand for gold and silver appears to be running out of steam, noting that ETF gold holdings have dropped 2.2% (or about 217,000 ounces) since Jan. 10th. This could be a trouble sign, as he pointed out that financial demand represents a whopping 32.7% of total demand for gold.

“The risk now is that if financial demand dries up, bullion and silver prices could retreat sharply,” Mr. Lapointe wrote in a note.

He added that the main drivers for gold (the need for a safe haven, a weak U.S. dollar and inflation) are not positive enough to “push up gold prices significantly” going forward.

On the other side, DundeeWealth Economics analyst Martin Murenbeeld points out that gold's decline has been fairly gentle despite all the alarm bells being rung in the media. Although the metal is likely to be held back in the near term due to an improving economic outlook, optimism over resolution of the Eurocrisis and tightening in emerging markets, the U.S. budget deficit is still going up and the Eurocrisis has only faded but not disappeared. Left unmentioned by both is the possibility of U.S. inflation ramping up.


I note an important tilt in the above: it's the gold bull that's accomodating the bear case, not the reverse. There's still a golden wall of worry, and no euphoria to speak of. So, there's less overbullishness for the gold market to weed out.