Are gold bulls shooting for $1,500 before year’s end?

Market Pulse: Dec 6, 2010

Fundamentals

Gold prices are trading on a firm note, modestly below their recent all-time high of $1424.30 an ounce (nearest-futures Dec contract).

Bullish factors include:

  1. Heightened concern over contagion of the European sovereign-debt crisis after credit-default swaps insuring Italian, Portuguese and Spanish government bonds all rose to record highs.
  2. Continued demand for gold as confidence in the Fed remains low and concerns remain high for an eventual inflation outbreak.

Bearish factors include:

  1. The rebound in the dollar index to a 2-1/2 month high.
  2. Slack inflation pressures which cut demand for gold as an inflation hedge saw a record low of +0.6% y/y for the October core CPI.
  3. Vulnerability to long liquidation pressure with hedge funds holding a record amount of gold.

Fundamental Outlook - Bull market correction - Gold prices firmed on European debt concerns despite a stronger dollar. Gold may see some weakness if the dollar strengthens further, but the long-term picture remains bearish for the dollar and bullish for gold as the Fed potentially is stuck with its QE2 program at least through June 2011.

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