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Gold Trods Zig-Zag Path But Long-Term Trend Points Up

16 July 2010, 8:54 a.m.
By Debbie Carlson
Of Kitco News

Chicago -- (Kitco News) --Gold has meandered around the $1,200 an ounce level lately, struggling to stage much in the way of rallies – or breaks – as it enters the second half of 2010.

In the short-term gold may have limits to its upside potential, but the longer-term trend remains intact most market watchers believe.

“The trend is still up, but July has been difficult for gold. It’s struggling with the counter-seasonal tendencies,” said John Person, president of National

Gold has been overshadowed by the strength in equities during the first several days of July, but many market watchers still don’t put much faith in the move higher in stocks. The first trickles of earnings reports have come in positive, but there’s a long season of earnings ahead. Those scant supportive earnings reports tend to get overshadowed by economic data, which lately has pointed to a soft-patch in the resumption of growth in the U.S. economy. The most recent example was Thursday’s retail sales report and the Empire State Index, a measure of manufacturing in New York.

Ken Morrison, editor and founder of the online newsletter Morrison on the Markets, said that gold’s lackluster performance lately goes along with some other commodity markets that have lost at least a favor with asset managers.

“Price behavior of gold futures and gold-related ETF’s since June 30 suggests there is a movement to reduce positions in gold and related investment and to turn the ‘paper profits’ into ‘booked’ profits…. Based on the high volume and sharp decline on July 1, it’s like the ‘longs’ could hardly wait to pull the trigger to lock in some of those gains once the quarter ended,” Morrison said.

He also said activity in the Commodity Futures Trading Commission’s weekly commitment of traders’ report underscores what is seen in the exchange-traded funds.

“It’s notable that in the week ending July 6, hedge funds reporting a long position to the CFTC declined by nearly 20% from 115 to 93 funds. Not only were longs exiting, but the same report confirmed that new short sellers were stepping up to the plate as the number of funds reporting short positions increased to 22 from a paltry nine in the prior week ending June 29,” he said.

Several market watchers have noted the drop in investor interest in gold since the prices hit their nominal all-time high in mid-June. Total ETF holdings dropped 4.4 metric tons from the high of 1320 tons in mid-June. Short-term it suggests that investors are uninterested in adding to positions, but the fact that redemptions have not accelerated means there’s still appetite to hold gold for the long-tem, the market watchers said.

Looking at technical charts, Morrison believes the August Comex futures are setting up a classic bear market flag as it struggles to break through the $1225-30 area, which could mean a correction is possible in the short-term. He said in the past two to three years that when gold has made new highs, then corrected, those corrections have been anywhere from 15% to 30%. A 15% correction from the mid-June intraday highs around $1,266 would mean a fall to $1,075.

Gold normally experiences a choppy price trend at this time of year, and this year is no different, Person said. The yellow metal is likely to weaken in the near-term, but by mid-August that should end, and prices are likely to rise into year-end because of seasonal patterns.

He said provided during the next four weeks gold will hold above $1,100 on a weekly basis the yellow metal could trade between $1,250 and $1,450. “If we see a weekly close under $1,100 (in the next four weeks) then all bets are off. That means something has drastically changed,” he said.

Person doesn’t recommend shorting gold despite its difficulties to return to the recent highs. “If you don’t want to own it here, wait to buy on dips,” he said.

Alan Bush, senior financial futures analyst at Archer Financial Services is still bullish on gold for the long-term. “There are two ways to trade gold. You’re either out, or you’re long. I would never have a naked short in gold in case of a geopolitical incident that occurs or that a … chart signal is hit” and prices spike, he said.

Bush cited all the money supply floating around the world because of stimulus spending has the potential to be inflationary, especially if the global economy is in recovery. Future inflation is still a concern, even though inflation now isn’t an issue. He also cited the recent purchases of gold by different central banks as price supportive.

But some believe the global recovery is in doubt.

Shawn Hackett, president of Hackett Global Advisers said he sees inflation in the long-term – but not until 2011 – because he believes the U.S. is due for a deflationary move for the rest of the year. Souring economic data could mean the stimulus plans the U.S. government put in place have come to an end and for the economy to continue to grow, more stimulus is needed. However, given how much the U.S. electorate disliked the first stimulus package, politically he does not believe the Federal Reserve and Obama administration can offer another unless another crisis hit.

“I think we’re headed for a heavy dose of deflation in the fourth quarter,” he said.

Much like what the markets experienced in 2008-09 with asset values declining, something similar could happen later this year. He said money supply contracting despite record low interest rates as consumers pay off debt and that leaves less money around to buy goods. “In the long-term, that’s a good thing, but in the short-term it isn’t,” he said.

In a deflationary scenario all assets – gold included – would fall. He said gold could trade in the $950 to $1,000 range – and that could offer investors a chance to buy the yellow metal at a discount to current prices. “That would be a fantastic time to buy gold as once we’re in the reflationary cycle you can maximize the upside,” he said.

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