Gold Flirts Wth $1,300; What Is The Short-Term Ceiling?

On one hand, you have optimism. Gold bugs believe that gold’s ceiling is well beyond $1,300 - even in the short term, to say nothing about the long term.

On the other hand, you have goldbears. They believe that gold outperforming the stock market this strongly in 2016 means that the good run can’t last forever - “what goes up, must come down.”

Only one side can be right.

With gold prices hovering around $1,300 this morning - which isn’t surprising given the recent news from the Fed - it’s tempting to believe that gold has hit a ceiling. The law of economic gravity dictates that what goes up, must come down.

Unless, of course, the gold bears have it all wrong.

Are We In Another 2007?

CNBC notes that gold’s surge over the stock market is eerily reminiscent of late 2007, which many investors could interpret as the deep breath before the plunge. In 2007, poor economic signs did not yet drag down the stock market. But in 2008, that all came crashing down.

One might argue that the current situation looks a bit like that. Gold is outperforming stocks, but the stock market hasn’t fallen off just yet.

"Fear about a lot of really negative news flow is probably driving people into gold, even though it's not driving people out of the equity market for now," said Manhattan Venture Partners Chief Economist Max Wolff to CNBC. "That makes us nervous and makes us look at gold..."

Of course, this isn’t news to anyone who’s been looking at the reason for gold’s increases in 2016. But the real question is, are these increases going to continue to happen? Are we in another version of 2007, or is gold’s rise limited by other factors? To examine that we’ll have to gauge exactly what those factors are.

Getting An Idea Of Where Gold Is Headed after $1,300

It seems a foregone conclusion that gold will reach $1,300 sometime soon - and may stay planted there at least for a while. But that doesn’t mean you shouldn’t dig up your own information in order to see if gold makes sense for you.

FT.com lists five factors in the price of gold that we’ll continue to keep an eye on throughout the year, and, indeed, as long as we’re interested in gold:

• The Fed: The Federal Reserve’s policy in determining interest rates and the supply of money always has an impact on gold because gold is priced in U.S. dollars.
• The dollar: Speaking of the dollar, it often has an inverse relationship with the value of gold.
• Demand: Especially by investors, although consumer demand for gold has been one of the factors driving up gold prices this year as well.
• China/India: Large markets for gold. The Shanghai Gold Exchange, in particular, is one to watch.
• UK policy: With the United Kingdom potentially leaving the European Union, look for big changes in the price of gold as investors look for more safe havens.

One thing is clear. Everywhere you look, investors seem to be flocking to safe havens like gold. What does that say about the metal - and the state of the economy as a whole?