Despite a recent pullback, gold continues to give out a strong bullish message.
Think about it in logical demand and supply terms. Total supply of gold doesn’t alter much. In fact, it only grows at about 1% a year. Meanwhile, demand has been rising as investors flock to the yellow metal as an inflation hedge. This means prices will rise.
Take a look at the chart below. It tracks gold prices in sterling terms (black line) for the past five years. You can see the sharp upward trend from 23 Oct 2008 to 20 Feb 2009 as its popularity started to soar. It gained an impressive 50% during this period.
Despite a recent pullback, gold prices will rally
Source: 24hgold.com
It then hit a peak at £680/oz (circled) and has fallen since. But this pullback is not the end of the bull market in gold. The fall that we see on the chart is more to do with the strengthening of sterling against the dollar. That and the fact that investors moved out of gold and back into equities as markets recovered.
But gold prices haven’t gone far enough to reverse our bullish stance. In fact, the current trading range of £520-£600/oz is a decent entry point for new investors. However, look out for a break below the level of £500/oz, which could undermine positive market sentiment.
Almost everything is in place for a new surge in gold prices. The threat of inflation looms large. A rise in crude oil prices triggers the same concern, providing support to gold. And the equities rally doesn’t have legs - as soon as it falters, you’ll see investors again piling back into gold.
All that needs to happen for gold to start rallying in sterling terms is for the pound to start falling against the dollar. Given the state of the UK economy, this really isn’t that difficult to imagine.
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