Q1 2012 Outlook for Gold Not Looking too Bad so Far...

Yes there's a European crisis and yes China is slowing down. But all this and gold still rose steadily for three days? I might have a decent theory...

The European crisis has been the topic of focus for quite some time now, but what I am more interested in is WHEN that crisis is finally accepted and by 'accepted,' I mean that its dire state is more or less absorbed into the mainstream investors' minds and therefore no longer drastically affects gold and other precious metals prices. From last Thursday to this Tuesday, gold has made a consistent climb from $1,525 to breaking through $1,600 and landing near $1,607.

All of this occurred despite Europe. Of course an even better scenario would be one in which further expected crises in Europe fail to suppress gold, BUT THEN future actions like the ECB further cutting interest rates and the offering wide scale monetary easing BOOST UP gold prices. This would be wonderful indeed and an old man can dream.

Gold's 3 day run also occurred despite the Chinese Premier Wen offering such ominous undertones as: business conditions may be “relatively difficult” this quarter and monetary policy will be fine-tuned as needed; “We see downside pressure on our economy and elevated inflation at the same time...;” and “We also face problems of weakening external demand and rising costs for companies.” Typically, any damage or pain to China's economy could hurt gold prices severely especially IF this would indeed affect China's DEMAND for gold.

However, I have a theory as to why there may have been no further steep dive for gold these past few days. And that is that China, while fighting inflation and a slowing expansion, will FURTHER look into gold as a 'safe' purchase, and that the prior drops in the price of gold may have been good opportunities for China's central bank to increase its holdings of the yellow metal. According to Zhang Jianhua, the research bureau director at the People's Bank of China, as quoted in the Financial News (a newspaper published by the Chinese central bank), "The Chinese government... needs to further optimize China's foreign exchange asset portfolio and seek relatively low entry points to buy gold assets... Gold remains the only safe haven for risk-averse investors... Now is the most opportune time for China to buy more gold assets when prices of the yellow metal are dropping, to ensure the country maintains and protects a well-diversified foreign-exchange portfolio."

So perhaps gold's drop to the low $1,500's triggered Chinese entry orders? I'd like to thinks so. In my humble opinion, that low may have been the best time to add further positions for longer term investors (which is what I did at least).

So with Europe still licking its wounds and China getting ready for a grueling slow acting flu, I must admit that gold didn't do too bad by piercing through the psychological $1,600 resistance level.

What MAY be a negative influence on gold, however, could be a strengthening U.S. dollar amidst signs of an improving U.S. economy. U.S. manufacturing rose to 53.9 on the famous ISM factory index and this together with reportedly improving employment conditions could stave off any attempts by the Fed at a QE3, which could in turn lend some strength to the U.S. dollar and thus operate against the yellow metal. The next few weeks should prove quite interesting and I intend to pay close attention to the long term dynamics of, and reactions to, the global economy.

Patience and more power to all you bugs out there,

- Tom

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