The gold price has spent the last couple of months consolidating the gains we saw at the beginning of the year. Despite the fact that the Federal Reserve is tapering and despite the decidedly bearish stance of the market and of analysts, gold has risen about 7 percent this year, and it currently sits at about $1,300 per ounce. This is after trading from about $1,200 per ounce up to just under $1,400 per ounce.
Since pulling back from the $1,400 per ounce level, gold has been trading in a very narrow range. We have seen buying come in at about $1,280-$1,285, and we have seen selling at about $1,310. Furthermore, this range seems to be getting narrower and narrower, which suggests that once this consolidation stops gold is going to break dramatically either up or down. Which way will it be?
Despite the fact that the gold price has risen this year and despite the fact that it has made a double bottom at about the $1,180 per ounce level, investors are decidedly still negative on gold, with the exception of the long-term believers. Investors are disappointed that gold failed to rise upon the Federal Reserve’s quantitative easing announcement, and they are also disappointed that it failed to rise as tensions grew in the Ukraine. They figure that if gold cannot rise on these events then gold must not be fulfilling its function as an inflation hedge, or as a hedge against geopolitical uncertainty.
From a short-term perspective these investors are right to be suspicious. But at the same time, markets are not simple cause-and-effect mechanisms. Inflation may cause the price of gold to go up, but the announcement of an inflationary event doesn’t necessarily lead to an immediate rise in the gold price, especially considering that the gold price rose dramatically into this announcement as traders anticipated additional Federal Reserve stimulus in the summer of 2011.