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Looking For the Right Reasons to Own Gold?

After rising 0.85% last week, the U.S. Comex gold futures fell 1.25% on Monday and Tuesday, and traded as low as $1,591.5 early Tuesday New York morning. Owing to more traders being away on vacation, external markets have been quiet this week, with the S&P500 rising 0.14%, the Euro Stoxx 50 increasing 0.37%, the CRB Commodities Return Index falling 0.5%, and the Euro/Dollar rising 0.27%. Since Friday, the U.S. 10-year Government bond yield has risen 8bp to 1.74%, and has surged 35bp since the low on 24 July.

Gold price has ranged-bound within $1,535 to $1,700 since March this year, so it is not surprising that investors are searching for the right reasons to own gold. Global economic news has been mixed. China’s recent trade data have been disappointing, and Japanese Q2 GDP rose an annualized 1.4%, less than the 2.3% expected by the economists, boosting hopes of economic stimulus. However, the U.S. retail sales beat estimates, and rose 0.8% in July, while Germany’s Q2 GDP rose 0.3%, and France’s GDP was flat versus Q1, both better than expected, dimming hopes of more stimulus.

While the spot price of gold has not surged above the high of $1,921.18 since last September, traders saw gold price being well-supported above the level of $1,600. Bloomberg reported that in Q2, George Soros bumped up his gold ETF holdings (GLD) by more than 50%, while Paulson & Co. raised its holdings in GLD by 26%. At the same time, speculative funds’ net long positions in gold futures and options remain 66% lower from the high in August 2011, making the positioning rather clean.

On the technical side, Barclays expects the sideway trends in gold to continue in August, and recommends buying on dips around the $1,545/1,560 area. If gold can break above the $1,640 area, then Barclays believes gold price can move towards $1,700, although gold needs to trade above $1,800 to confirm the resumption of a strong uptrend.

For the time being, a better reason to hold gold is for prudence rather than for speculation, as economic outlook is still very uncertain, according to Louis James of Casey Research.

Kelly Smith
Sharps Pixley, London

15 Aug 2012 | Categories: Gold

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