Gold Market Changing Character

August 13, 2012 – Gold prices gained about 1 percent on the week as gold reached a weekly high of $1,626 per troy ounce and closed on Friday at $1,619 per troy ounce.

The SPDR Gold Trust, the world’s largest gold-backed exchange traded fund, increased by 0.26 percent to stand at 1258.15 tons on August 10, 2012 against 1254.94 tons at the end of the week ending 3rd of August 2012.

The growth in prices has been supported toward the upside by anticipation of stimulus measures from central banks as weak economic data from major economies filters in through markets.

Additionally inflation, long known as a factor very much favorable to gold demand, is in question for gold enthusiasts as a deflationary risk is now present in global financial markets.

The deflation factor is widely held as the next issue that could affect the gold market and may be more pervasive than the widely held speculation about central banks taking measures to shore up the economy, whether here or in Europe.

Thus far, central banks have been proceeding with very cautious tones and this has hindered gold from a price breakout in the short term.

Gold appears to be undergoing a crisis of character in the current market, having lost the definitiveness it has recently held as an inflation hedge and as a safe-haven asset. While gold surely still is both a hedge against inflation and a safe-haven asset, central bank policy has made those roles more muddied in the markets than would normally be expected.

A level of resistance on the upside between $1,625 and $1,630 per troy ounce continues to keep the precious metal range-bound for the beginning of a fourth month as markets wait for a clearer indication from central banks in regards to their monetary policy.

In the silver market, the industrial uses for the precious metal have made two-sided fundamentals more complicated. However, in the current market where gold’s status as a safe haven asset is troubled by indecisive central bank action, silver’s industrial usage is seen as being the basis for a more stable macroeconomic performance. Silver prices have slipped 11 percent this year from an average of $30.80 per troy ounce in January to $27.40 per troy ounce in July.

Over the longer-term, however, the industrial applications of silver may make the precious metal better able to withstand current market pressures.

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