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GCQ31,293.20, +9.00, +0.70%

August gold futures

Commodities Corner

July 19, 2013, 6:01 a.m. EDT

Bernanke is only partly right about goldFed chief said no one understands gold prices, but investors can

ByMyra P. Saefong, MarketWatch

SAN FRANCISCO (Marke tWatch) Fe deral Rese rve Chairman Ben Bernanke said no one , including himself, understands gold prices,

but that doe snt mean you cant.

Nobody really understands gold prices and I dont pretend to understand them either, Bernanke said during the Senate Banking Committee hearing

on Thursday.

Hes not too far off the mark. Its more like: gold is difficult to understand and it takes a lot of work to analyze the factors and their influences on the

precious metal.

After all, gold (CNS:GCQ3) is influenced by many factors every day. Those include everything from central-bank talk and technical price triggers to

exchange-traded fund flows, moves in the U.S. dollar, physical demand and the outlook for the global economy.

Gold is the asset everyone turns to when the world is going to hell in a handbag, said Jonathan Citrin,

founder and executive chairman at investment firm CitrinGroup.

And to predict the metals future value, one must be able to predict demand, the impact of global

monetary stimulus, relative currency values, inflations probability, equity-market trajectory and more,

he said. It is near impossible to predict any assets future, with gold being atop the list of the most

difficult.

But golds moves often do make sense. So if investors look more closely at whats been happening to

the yellow metal, especially when it comes to basic supply and demand issues, they will get a good idea

of what direction it may favor next.

The Fe d

Lets start with the uncertainty surrounding the Feds $85 billion a month in bond purchases, also

known as quantitative easing.

QE tends to weaken the dollar and raises the risk for inflation. Gold often benefits from a weaker dollar and is seen as a hedge against inflation, so at

its core, golds reaction to QE and the potential tapering of it is tied to the outlook for the metals demand.

The first round of QE began in late 2008 and gold prices shot up almost in a straight line to their

all-time high near $1,900 an ounce in August 2011. Recently though, theyve hit their lowest

levels since 2010, as the market expects the Fed to ease back its QE program in the wake of an

improving U.S. economy.

The assumption here is that the economy isnt too fragile to survive the crutch of QE being pulled

away, said Brien Lundin, editor of Gold Newsletter. There is some doubt on this, even within the

Fed.

Bernanke said on Wednesday that the proposed timetable for tapering bond-purchases was not

set in stone and on Thursday, he said it was too early to make a judgement on whether the

central bank will slow down asset purchases at its September meeting.

The Fed is currently running a merry dance of keeping everyone guessing, said Jan Skoyles,head of research at The Real Asset Co., a precious-metals investment platform provider. One

week they say they want to taper, then Bernanke says hell carry on printing for the foreseeable

future and then [Wednesday] he couldnt make up his mind.

Its no wonder gold is so volatile.

Specifically, Bernanke said Wednesday that because our asset purchases depend on economic and financial developments, they are by no means

on a preset course.

In other words, just because Bernanke said tapering was on his mind last time around, it doesnt mean that hell necessarily do it, said Adam Koos,

president of Libertas Wealth Management Group.

Still, investors and traders alike are big fans of potential delays in the tapering of QE, he said. The same goes for interest rates and tightening of

the Fed balance sheet, but its going to take more of the latter to see a material long-term change in the gold trend. Read about why heavy

shorting of gold may lead to a rally.

Supply and demand

Gold investors have been so preoccupied with the Fed lately that they might be missing out on some other important factors in play for the gold

market.

Demand from Asia, for one, is often mentioned among analysts notes as a key reason for a climb in gold prices on any given day.

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Federal Reserve Chairman Ben Bernanke said Thursday

that nobody really understands gold prices.

Reuters

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Why gold ETFs are falling

The price of gold is rising, but some funds that ow n it are

losing value. Brendan Conway explains w hat's going on

in this July 10 video.

Focus on gold-pr ice volatility has distracted most U.S. investors from noticing the strong demand for physical gold, especially by Asian investors,

said Edmund Moy, chief strategist at gold-backed IRA provider Morgan Gold.

Lower gold prices spurred the strong demand in Asia, resulting in a huge transfer of physical gold from the U.S. to Asian economies, especially

China, he said.

Comex warehouse gold stocks have been falling sharply. Among companies that store gold in Comexs warehouses, Brinks Inc. recently has seen a

massive decline in its gold inventories, falling to 257,000 ounces on July 11 from 570,000 ounces on July 3, according to Mark OByrne, Dublin-based

executive director at GoldCore thats a one-week drop of 55%.

A fall in gold held in trust by the SPDR Gold Trust (NAR:GLD) has also been a key reason for golds

price decline this year, with prices down more than 20% for the year so far. The ETFs gold held in

trust stood at about 936 metric tons Wednesday, down from roughly 1,350 metric tons on Jan. 2.

Comex and GLD inventories are declining. That physical [gold] is going somewhere, said Skoyles.

If it wasnt in demand, then it wouldnt be leaving the warehouse.

She points out that net gold exports to China continue to climb on a monthly basis, gold coin

premiums remain on the up and there are huge premiums on the Shanghai Gold Exchange as well

as record deliveries.

The Shanghai Gold Exchange supplied 1,098 metric

tons in the six months through June, compared with

1,139 metric tons for all of last year, according to

Bloomberg, citing data from the bourse.

This is a very large number and the market has yet to

appreciate the scale of Chinese demand, said

OByrne. Demand from India, as well, is set to remain

robust for the entire year despite the recent sharp fall

from record levels.

That robust demand comes at time when mining

companies, including AngloGold Ashanti Ltd.

(NYSE:AU) (JNB:ZA:ANG) the worlds third largest gold producer, are announcing cuts to production following the 23% price drop in the second

quarter.

Several companies have announced they are not going to develop a mine or expand their mines because of where prices are right now, said Malcolm

Gissen, co-manager of the Encompass Fund (MFD:ENCPX) . Eldorado Gold Corp. (TOR:CA:ELD) (NYSE:EGO) is among the more recent.

Supply has grown only about 2% per year for the last 40 years, according to Gissen. If we see supplies decline in the next six months, we could see

consumers, especially in Asia, step up buying.

And thats a force to be reckoned with.

Buyers in Asia and the Middle East are strong hands who will hold onto their metal as a store of wealth, OByrne said. Their significant, and still

very robust, demand should support prices between $1,000 an ounce and $1,200 an ounce.

Thatll likely lead to a resumption of golds bull market before the end of the summer and into 2014, he said.

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