The Gold Report: Brien, cited the escalating European and U.S. debt crises as triggers for the August 22 spike in gold prices, when it briefly eclipsed the $1,900/ounce (oz.) mark. Since then, the French bank Société Générale has been downgraded and austerity measures are forcing the Greek economy further into recession. Despite these significant catalysts, the gold price remains range-bound between $1,750 and $1,850/oz. Why isn't gold reacting?
Brien Lundin: If the European debt crisis and the S&P downgrade of U.S. sovereign debt had happened separately, say a couple of months apart, I think gold would have risen just as far, but the rise wouldn't have been as steep and the market wouldn't have overheated. But they happened to occur right on top of each other, so the market got ahead of itself and went nearly parabolic. Speculators who were merely trend-following traders came into gold, but the end of the rally sent them all packing at once. That dealt a sharp psychological and emotional blow to the market that we are still recovering from. Since then, we have seen a lot of very fluid, hot money coming in and out of the market.
More recent news from Europe hasn't had quite the same effect. We have seen some itchier trigger fingers, people playing the news of the day and getting right back out. We have also seen physical gold buyers from Asia come in on the price dips.
The result has been rallies tempered on the upside by the speculators abandoning trades more quickly. We have also seen drops tempered by bargain-hunting, physical gold buyers coming in on the downside. In short, gold is in a consolidation phase, awaiting the next trend, which I think will continue to be headed upward.
TGR: You mentioned Asian physical buying. Recent rumors suggested China could be buying Italian debt to help Italy out of its problems. Is that bolstering the euro and keeping investors out of gold?
BL: I think that China helping out Italy hurts the gold price in an indirect way. It's a sign of China knowing which side its bread is buttered on and knowing that it needs a stable Europe to support its economy.
We saw that need for stability when the European Central Bank and other central banks announced a coordinated U.S. dollar liquidity program and Germany and France said that Greece would definitely stay in the euro. All of this is part and parcel of trying to calm the markets down in the interim and to show that the gold price is essentially capped or that the rise is being dampened by official intervention.
TGR: Are you implying that the euro is doomed? (more)
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