Gold Sets for New High Above 1800

Gold remained strong after rallying to a new record high of 1773.1 earlier today. Despite elevated price level, the yellow metal has got ready to advance further (probably above 1800) as US' growth outlook deteriorates and sovereign debt concerns in both sides of the Atlantic persist. Fed's stance at the upcoming FOMC meeting will give a clue on gold's near-term outlook.

Gold price and net speculative long positions in Comex futures traditionally trade in tandem with the inverse of TIPS yield. This reflects that the yell metal tends to rise when real interest rates fall. Gold's recent rally accelerated in mid-July when price broke above April's high and set new records. However, net length for gold futures remained subdued at time. According to CFTC's Commitments of Traders report, net speculative length for gold fell below 158K contracts in the first week of July, compared with as much as 260K contracts recorded in November 2009 and October 2010, and only turned around in the second week of July. Yet the latest reading of 247k contracts remained below the record high. Further increase net long futures positions suggests gold price may rise further.

Indeed, global economic developments also support gold price. US GDP growth in the second quarter was disappointing while the first quarter reading was downwardly revised. S&P's downgrade of US debts and recent selloff in financial markets may worsen the situation. In the Eurozone, investors remained unnerved even after the ECB began buying Italian and Spanish bonds. The focus has now shifted to France with CDS and French bond's yield spreads widening sharply. There have been rising speculations that France will be the next AAA country, after the US, to be downgraded. Being one of the six nations possessing an AAA rating in the Eurozone, France is the one with the highest deficit (debt/GDP ratios will rise to 86.9% in 2012) and the only one with current account deficit. The swing factor on the rating is whether France has a feasible plan to balance its budget in the next 5 years.

While risky assets such as stocks and high-yield currencies may rebound after the panic selling, investors will stay cautious and prefer parking their capitals in safe-havens. Apart from gold futures, rising demands for gold ETFs and central bank purchases should also help send the metal to new highs.

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

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

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