Gold is up 12% over the last three months and hit an 11-month high on Friday. Many are wondering if this positive strength will continue and the article explains four reasons gold could break through the psychological $1,800/ounce barrier next week.
Plan B Economics
October 7, 2012
Gold flirted with an 11-month high early Friday, only to retreat after a strikingly positive jobs report. With gold up over 12% over the past three months, investor focus is returning to the shiny metal.
In fact, according to Reuters:
SPDR Gold Trust (GLD), the world's largest gold-backed exchange-traded fund, said its holdings hit a record high of 1,333.44 metric tons by October 4.
So will this positive strength continue? Below are four reasons gold could break through the psychological $1800/oz. barrier next week:
1. Trader bullishness is rising: According to an October 5 Bloomberg survey, traders are the most bullish in three weeks. Twenty of 32 traders participating in the survey expect gold prices to rise next week. A similar Kitco survey shows 78% of traders are bullish on gold for next week. Also, U.S. Commodity Futures Trading Commission data show that hedge fund bets on gold are the most bullish in seven months. In the retail physical market, Bloomberg also reports that coin sales hit a nine-month high.
2. Chinese traders returning from Golden Week holiday: Chinese traders -- often a large source of demand for the metal -- took last week off to shop and travel (a.k.a. get stuck in miles-long traffic jams). With Chinese traders returning to work, fuel may be added to the gold fire driving the recent rally further.
3. Spain may be close to requesting a bailout: Late last week, Spanish bond yields rallied as market participants anticipated a bailout request. Spain has been holding out, but may be approaching the point of no return, as budgets are stretched by an imploding economy and political power is threatened by growing social upheaval.
According to Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich: "Markets are focused on the idea that we will see Spain ask for a bailout and this is helping the country's bonds. Asking for aid would clear the way for the ECB to buy the bonds."
And there you have it in a nutshell. Spain's request for aid would open the floodgates for even more ECB monetary easing. This would be positive for gold, and a Spanish bailout request could be made as early as next week.
4. Positive momentum: Momentum begets momentum. Regardless of how little sense this makes (in my humble opinion), it is often a truism in the world of trading. Gold's recent positive momentum is already attracting investor attention, as seen in the various trader sentiment surveys mentioned above. Compound this with the returning Chinese traders, and current gold momentum could have support.
According to Adrian Day, chairman and chief executive officer, Adrian Day Asset Management: "Clearly the momentum is with gold now, and people who were waiting for a more significant decline -- and there were many -- are racing to catch up."
These four factors, especially when combined, could help drive gold prices through the $1800/oz. barrier over the next week.
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