The gold market has been behaving as expected. Following its $300 advance from August through November, we thought that gold would pull back and consolidate for a few months before commencing its next move to the upside. Gold has been acting well in light of the strong rebound in the U.S. dollar since it bottomed simultaneously with gold’s peak in late November/early December.
The U.S. dollar index has rallied back to levels seen last August, but gold has only given back about a third of its gains since August. We continue to be bullish on gold on an intermediate to longer term horizon. Driven by demand from both private investors and emerging market central banks seeking diversification from paper currencies, we expect gold to reach $1500 at a minimum over the next two to three years, and it could potentially trade much higher if speculative dynamics really take hold. The downside risk in gold should be limited to $1000 to $1050.