Short-term buyers

If, on the other hand, you wish to trade in gold, and hence want to know which way gold prices are headed, the key variables to watch would be US inflation, value of the dollar, the world economic outlook, and sale of gold by major central banks.

Normally, the price of gold rises as inflation rises and the dollar weakens. A poor economic outlook also augurs well for gold. And a large sale of gold by a central bank increases supply and hence drives its price down.

Billy X Wang, gold analyst at India Infoline, portrays five scenarios to predict which way gold is headed.

Scenario J. J stands for Japan. What if, despite the Fed’s monetary expansion, a Japanese style deflation takes hold? In this case, since gold’s role as an inflation-fighter becomes redundant, its price is likely to decline.

Scenario W. W stands for Wonderland. In this scenario, the Fed manages to engineer a recovery (through monetary loosening), and is spot on in staving off inflation (through monetary tightening). In such a scenario, gold will again decline.

Scenario H. H stands for inflation hawk. The Fed decides that inflation is a graver threat than slowing growth. It moves decisively to kill incipient inflation and unwinds the recent monetary surge. Again, gold will decline.

Scenario L. L stands for lame. The Fed delays tightening of interest rates, fearing it will kill off an incipient recovery. Inflation reaches double digits. The Fed then makes a few half-hearted attempts to coax the inflation genie back into the bottle, but finds it difficult. In that case, gold soars.

... contd.