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GOLD - Buy the rumour - sell the fact

Gold's edging higher over the last few weeks can be attributed to a host of factors but certainly the rising cost of funding Italy's debt towards the pivotal 7% has had the market in thrall. The 7% has been seen as the level beyond which Italy would be forced to seek support from the ECB and IMF and, to put it frankly it remains, a moot point whether there is sufficient funding to do much for them. In short, gold prices have benefited from what has appeared to be a slow speed train crash in the Eurozone.

Gold prices have gained 15% since bottoming at $1530 on 26th September as the Italian 10 year bond rates crept higher. In a sense, investors were buying the 'rumour' or expectation that rates would rise through the critical 7% level. When rates finally went through 7% on Wednesday gold perversely fell - a case of selling the fact.
This has created a good entry opportunity for investors wishing to enter the market at an attractive level.

Italian rates have subsequently eased and are currently trading at 6.62% on the back of ECB intervention.

The outlook for the remainder of the year remains positive. Trading in December is traditionally quite lacklustre and we would expect gold to simply edge into the mid $1800's before trading activity tails off. Were this to be so, gold will have seen a fullsome 30% rise on the year which is a tad higher than we saw in 2009 and 2010.

As if the economic concerns were not great enough, the Iran nuclear debate rumbles and is the wild card. It adds an uncomfortable geopolitical dimension to the economic crisis - and this continues to be deeply supportive of gold. Reflecting this, the VIX index has nosed above the important 30 level again and closed last night in Chicago at 32.81.

It is tempting to ask what will happen to gold prices when these crises do subside ? Well the main tenet of gold's bull run remains - and at worst gold investors may have more modest gains based around the markets very attractive supply and demand fundamentals. That time still appears some years off though.

Ross Norman
Sharps Pixley, London

11 Nov 2011 | Categories: Gold

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