Gold’s primed for a breakout, but where to?

Gold prices have been sitting "just a stone's throw away" from record levels. The metal may finally be ready to break free from the tight trading range it has been stuck in for months. According to one expert, "the weight of the evidence points towards higher prices."

By Myra P. Saefong
October 12, 2012
Market Watch

Just a stone’s throw away from a record level, gold prices may be ready to break free from the trading range they’ve been stuck in for months.

“Concerns about overall global economic health have kept gold in a pretty tight trading range, but this is typical just before some type of breakout, up or down,” said Nathan Rowader, portfolio manager of the Forward Commodity Long/Short Strategy Fund . “Right now, the weight of the evidence points toward higher prices.”

For more than a year, gold futures have been trading within a less than $400-an-ounce range — between an intraday high in electronic trading of $1,909, reached on Aug. 23, 2011, and an intraday low of around $1,525, seen on Dec. 29, 2011, according to the CME Group .

Gold’s “return to near $1,800 is a sign that some rationality has returned to the market,” said Dawn Bennett, portfolio manager of the Bennett Group of Funds.

Gold futures last reached a record settlement on Aug. 22, 2011, at $1,888.70 an ounce on the Comex division of the New York Mercantile Exchange, according to the CME.

They closed at $1,770.60 on Thursday, up about 12% year to date.

Bennett doesn’t believe the runup from the $1,500 level is purely a response to the U.S. Federal Reserve’s third round of quantitative easing.

“We view the broader picture as the reason to invest in gold,” she said, emphasizing that she’s not discounting the effect QE has on gold.

“In 2013, the developed world is going to have to deal with its massive debt problems and policies that have spent the last few years devaluing local currencies,” she said. “As this happens, gold will be one of few havens available to investors looking to protect their wealth.”

Rally prospects

To many, gold’s chances for a rally, as well as a record, by the end of the year are strong.

Viktoria Palushaj, CitrinGroup

“Gold prices are likely to finish the year with the same strong, upward momentum that was seen during the beginning of the year — only this time, prices will rise further and surpass the Comex settlement record high of $1,888.70,” said Viktoria Palushaj, market analyst at investment firm CitrinGroup in Birmingham, Mich.

“The anticipation and realization of a third round of quantitative easing by the Fed has predominantly contributed to the consistent rise in asset prices we have seen since August,” she said.

In general, quantitative easing tends to be negative for a country’s currency and positive for gold and other hard assets that are seen as an alternative and hedge against devaluation and inflation. See The Tell blog: What is QE3?

“The machinery of democracy ensures that the global economy will continue to be flooded with ‘new’ money — driving up the price of hard assets, particularly gold,” said Cary Pinkowski, chief executive officer of Astur Gold Corp.

Still, it looks like gold prices haven’t moved that much since the day the Fed detailed another round of large-scale bond purchases to boost the U.S. economy. Since Sept. 13, gold has spent more trading sessions rising than falling, but prices as of Thursday were still less than $2 below the $1,772.10 close on the Fed announcement day.

The tight trading range for gold “suggests that we are on the verge of a sharp move and once resistance at $1,800 [an ounce] is broken, which we believe it will be, we should see sharp moves to the upside and new record highs soon after,” said Mark O’Byrne, executive director at GoldCore.

Data shows that inflows to gold exchange-traded products, which include notes and funds, reached $7.7 billion in the third quarter of this year, the best-performing quarter in just over two years, according to ETF Securities.

“Investments in exchange-traded gold funds have been increasing at a brisk pace and should continue through 2013,” said Malcolm Gissen, co-manager of the Encompass Fund .

Central banks have set a new record, acquiring nearly 157.5 metric tons of gold in the second quarter of this year, compared with 66.1 metric tons the same quarter last year, said Gissen, who cited data from the World Gold Council. “With countries around the world printing money and devaluing their currencies, investors are likely to continue investing in gold,” he said.

Correction on tap?

A rally in gold by the end of this year, however, is not a sure thing.

Risks to a potential rally include a change in U.S. fiscal policy via an incoming Mitt Romney administration, said Jeffrey Wright, a managing director at Global Hunter Securities.

However, “a Romney administration will not be able to reduce the growth of borrowing by the U.S. government quickly without risking a severe recession, so it will only delay the continued depreciation of the U.S. dollar and increase in price of gold,” he said.

Still, Vedant Mimani, lead portfolio manager of the Atyant Capital Global Opportunities Fund, a precious metals-focused fund based in Miami, thinks gold prices are above their fair value already.

“There is a correction coming in gold and it will be brutal,” said Mimani, who sees the “fair value” of gold at $1,100 an ounce.

Mimani thinks investors who are bidding up gold prices ascribe more power to the Federal Reserve than it actually has. “Even if the Fed were able to devalue the dollar through a series of [QE] programs, the dollar would need to be devalued by 60% to justify gold’s current price,” he said.

Since the Sept. 13 Fed QE3 announcement, the greenback has appreciated, with the ICE dollar index up about 0.7%.

There’s also a risk that the gold market has experienced a short-lived recovery known as a “’dead-cat bounce’ and we’re headed back to the mid-$1,500s,” said Mark Leibovit, chief market strategist at

If that’s the case, gold could post new lows under $1,525, he said.

Still, there is a good chance gold will hit a record by the end of the year, “if it corrects a bit first — perhaps back down to $1,700, setting up a less ‘overbought’ condition,” said Leibovit.

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