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Can Gold Rise Higher?

Last update on: Feb 02 2017

Gold’s been a puzzle to many observers lately. It’s been in a trading range despite global central banks heavily engaging in money printing. Easy money should lead to higher gold prices. Instead, most recently gold has stayed near the bottom of the trading range.

Is the gold bull market over? Most likely, I think it has a bit more to run. Gold’s recent decline for U.S. investors is due largely to the rise in the dollar. In addition, gold is a thin market. It doesn’t take much to move the market, and hedge funds have been selling over the last year. That selling probably is nearing an end.

This post puts the gold market in perspective. It covers recent selling and why gold likely is nearing a bottom. One key point is that investors are likely to be less of an influence on the market soon. Instead, consumers and manufacturers will drive the price higher.

With some of the fast money out of the market however, there is a potential for firmer gold prices. In spite of the recent talk of the Fed exiting the aggressive monetary expansion policy, so far all signs point to more asset purchases by the central bank – at least in the near future. Historically gold price roughly followed the US monetary base (or bank reserves), particularly since the Lehman collapse in 2008. Recently the two trends have diverged. But as bank reserves continue to increase at a steady clip in response to Fed’s purchases, this divergence is unlikely to grow further.

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