While some of the messages being sent to the gold market seem mixed at the moment, Martin Murenbeeld believes that the bearish arguments for gold are unlikely to hold sway over the longer term.
Renewed concerns about the fate of Greece and large portions of the euro zone more generally saw gold fixed in London on Wednesday evening at $1,522.00, a new high. On the same day it hit a new high in sterling terms. Since then however, it has struggled to hold much above $1,500.
And, it is for this reason that Dundee Wealth Economics chief economist, Martin Murenbeeld believes it may be worth revisiting some of the bearish arguments against gold that he made earlier in the year.
That is not to say that Murenbeeld is a gold bear; far from it. He believes that gold is likely to continue upwards over the longer term as the arguments for gold are significantly more compelling that those against. but, he cautions in his latest Gold Monitor report, "the bear factors "can dominate market trends from time to time - if only briefly."
The first of these arguments, he says, is the potential for policy exit strategies in China, India and the US, which could weigh on the yellow metal.
In the US, he says, while the end of QE2 is not a Fed "exit strategy" per se, it is not a positive for the gold market.
Murenbeeld points out that while Bernanke admitted that recovery was continuing at a slower-than-expected pace, he made no mention of the possibility of QE3 and even went as far as to say that conditions were better than when QE2 was implemented.
"What Bernanke didn't say, because this is a touchy subject, is that the dollar should also decline. He knows that the greatest danger for the US economy is still disinflation and underperformance, just as the "economic bears" have argued And he is aware that the Peterson Institute claims the dollar is still seriously overvalued against the Asian currencies," Murenbeeld points out.
Murenbeeld's second bearish argument, revolves around the dollar and its interaction with the euro in particular.
As he points out, "Europe's debt problems have tended to periodically favor the dollar over the euro. Gold doesn't always decline when the dollar rises, because the dollar often rises on the back of European debt issues that are inherently positive for gold, but a firmer dollar is a negative headwind for the dollar price of gold nonetheless."
While these two forces work against each other, Murenbeeld, is increasingly convinced that the pressing question within the euro zone is not, whether Greece will default but, when. And, more importantly if it will be able to postpone it until banks are able to withstand the write-downs that will follow.
But, he says, while a scenario in which Greece is kicked out of the Euro-system, Euro-banks taking a huge hit, yet somehow or other the Euro-system weathering the contagion (in Portugal and Ireland, to say nothing of Spain and Italy), and fiscal sanity returning. would be bearish for gold, the probability of all this is very low.
"Much more likely," he says, "is that peripheral country paper morphs into the "subprime paper of the 2010's", and central banks pour money into the banking system to arrest a global banking crisis....Accordingly, we continue to think gold will take out its inflation adjusted high during this bullish cycle, even if it isn't likely to happen tomorrow!"