Why Isn’t Gold Above $1,000? - by Aaron Hoddinott

Gold has been a very frustrating commodity for many investors this year. The precious metal had every reason to skyrocket in value over the last 6 months and has yet to settle, but for a brief moment, above $1,000 an ounce in 2009.

The question I am constantly asked is: Why isn’t gold trading above $1000 yet?

There are many reasons, but, before I get started…We should all hope and pray that gold doesn’t hit $2000 an ounce within the next 2 years like many gold bugs are predicting. If this happens, we might as well throw in the towel on the chance of our economy recovering within the next decade. If $2,000 is gold’s value in the near future, then something has gone terribly wrong in our markets and economy. And our money is worth squat, resulting in fear taking over the minds of investors everywhere…Not good. With that stated, I think a realistic value for gold, given our current economic environment, is $1200 - $1300 an ounce. But that won’t happen overnight. It’s going to take at least a year.

Investors need to have patience with gold as there are many factors influencing its value.

Below I have outlined what has helped gold increase in value (and will continue to) and what is holding it back:

Driving Gold Up:

• In Q1 there was a 38% increase in gold demand. The key to this statistic is that it was strictly through investments in ETFs. The most notable gold ETF is GLD (SPDR Gold Trust), which now trades more than USD $1.26 billion per day. Because of its growing popularity this ETF now has a major influence on the price of gold. And its influential power is only getting stronger by the day as more investors find out about it. Last year GLD (SPDR Gold Trust) held the #8 spot in the world for gold holdings, ahead of China and the Dutch. This tells me that mutual funds, retail investors and hedge funds are now becoming world influential powers in the gold market. And where do you think they will be investing when the stock market takes a dip on us? You guessed it. GLD or other gold ETFs.

• Sales of gold bars are up as well. For the past few months the demand for gold bars has skyrocketed. They are being sold for roughly $1150 an ounce. This is a leading indicator of where the spot price for gold is headed (currently $956.00 an ounce).

• Fear was at all time highs in Q1 of 2009 - the biggest driver in the price of gold.

• The dollar index is trending down rather quickly. The dollar’s health remains dependent upon foreigners’ appetite for U.S. assets, which will decline as the economy falters and the government continues to inject additional liquidity. This will drive up inflation and drive the USD down (only driving gold up further).

• In the past twelve months, the Federal Reserve’s balance sheet grew by 146%, the Bank of England’s by 158%, the European central banks’ by 58% and the Swiss national bank’s by 74%. When inflation finally kicks in (aggressively), it could provide the KICK gold needs to push through $1,000 and never look back.

Holding Gold Back:

• Strictly limited gold sales (403.3 metric tons -12% of its total holdings) are being discussed by the membership of the IMF as part of a package of expenditure and income measures to put the IMF's finances on a sustainable basis.

• Because of the recession, jewelry and industrial purchases in gold were down dramatically in Q1. The drop in jewelry sales, particularly in India, is reason for concern. It has risen moderately in Q2.

• Q2 has brought back some positive sentiment into the market. Gold has always risen on investor fear. When fear subsides, gold’s value decreases.

• Conspiracy time: The US government does not want to see