Gold Continue Rebound: Has Sell-Off Run Its Course?

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Gold continued rebounding from oversold levels Monday thanks to strong physical demand, bargain hunting and short covering.

Spot gold prices jumped 1.41% to $1,427 an ounce.SPDR Gold Shares ( GLD ) popped 1.78% to 137.88.

"Based on the size of the recent trading range between $1,800 an ounce and $1,525 an ounce, we could see a measured move down to the $1,250 ounce region," Mark Arbeter, chief technical strategist at S&P Capital IQ, wrote in his weekly technical report. "That would represent about a 38.2% retracement of the entire bull market that started in 2011. Once 'the' low is in, we expect a long period of sideways price action with a major ceiling at $1,525 an ounce."

U.S. Commodity Futures Trading Commission data show that speculators, or the so-called "dumb money," are holding the fewest number of long positions in gold since late 2008, when gold formed a major price low. They're usually wrong and are considered a contrarian indicator.

"That makes a strong statement that the small traders have given up hope on gold, and are buying into the idea that gold is going to collapse even further from here," Tom McClellan, founder of "The McClellan Market Report," wrote in his newsletter. "Given their track record, it seems that the opposite conclusion is much more likely."

Some market watchers attribute the sell-off the prior two weeks, in which gold lost 15%, to fears the Federal Reserve will end quantitative easing earlier than expected. But waning expectations of inflation as tracked by the Treasury Inflation-Protected Securities, or TIPS, break-even rate suggests that scenario is unlikely, according to Jeremy Siegel, senior investment strategy adviser to WisdomTree Investment.

The TIPS break-even rate fell to 2.32% Monday, indicating the Fed will continue quantitative easing "in full measure," Siegel wrote in a commentary Monday. The TIPS inflation break-even rate is the difference between the TIPS and Treasury yields of the same duration. A high 10-year break-even rate, typically above 2.5%, means inflation fear is running high, while a low breakeven rate, usually under 2%, suggests fears of deflation.

The U.S. is struggling to stoke inflation and will have to maintain its easy monetary policy through the end of 2014 at least, Dan Denbow, assistant vice president of equity portfolios at USAA Investments, told clients Monday in a note. The firm remains overweighted in gold and gold mining stocks in its asset allocation portfolios.

"Central banks continue to pursue an easy monetary policy, ultimately increasing the risk of inflation and currency devaluation in advanced countries," Denbow wrote. "Confidence in fiat currencies, or paper currencies backed by governments, has been eroding as the world's central banks continue to follow inflationary policies."

Market Vectors Gold Miners ETF ( GDX ) lifted 1.36% to 28.98, outpacing a 0.46% gain in SPDR S&P 500 ( SPY ). After plunging 23% month to date, GDX hovers near its lowest price in more than four years.

Gold mining stocks have sold off far below what their fundamentals command, Denbow said.

Mining costs run about $800 an ounce, way below gold's current price, says John Hathaway, manager of Tocqueville Gold Fund . Miners have become more conservatively managed and have room to hike dividends, he added.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: GDX , GLD , SPY

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