Is Sentiment Towards Gold Shifting Again?

A collection of gold bars and South African gold Krugerrand coins are seen at London bullion dealers Gold Investments Ltd. in this arranged photograph in London, U.K., on Thursday, April 4, 2013. Gold traders are split on whether bullion will plunge into its first bear market since 2008 as economies improve or rally as central banks buy more debt. Photographer: Simon Dawson/Bloomberg via Getty Images
Simon Dawson/Bloomberg via Getty Images

Gold has staged a big comeback in recent weeks, rebounding more than 13 percent since hitting a near three-year low late June, raising the question of whether investor sentiment towards the embattled yellow metal is about to shift again.

The precious metal, which traded close to a three-week high of $1,336 on Tuesday, has been supported by short covering and robust physical buying especially from China. Latest data from the China Gold Association (CGA) on Monday showed that the country's gold consumption rose 54 percent in the first half of the year, compared to the year-ago period.

Separately, in a sign that investment demand may be returning, holdings in the world's largest gold ETF, SPDR Gold Trust (GLD), rose by nearly 2 metric tons to 911.13 metric tons on Friday, representing the first increase since June 10.

"There is a clear conflict between physical and speculative demand right now, but as things stand, China's buying spree has been the bigger influence right now and has driven leveraged funds to cover shorts," said Chris Weston, chief market strategist at IG Markets, noting that if gold moves above $1,348, it could test the $1,370 level and then $1,400.

According to Barry Dawes, head of resources at Paradigm Securities, there's a strong case for buying gold, citing tighter supply in the physical market.

"The physical demand for gold is robust and we're seeing premiums in Asia that you don't see in other parts of the world," Dawes said.
"The physical market for gold is now really tightening up and the shenanigans being played by hedge funds and bullion and investment banks may just be coming to an end."

Victor Thianpiriya, commodity analyst at Australia and New Zealand (ANZ) Banking Group, who sees gold ending the year at $1,300, disagrees that the physical market will face any meaningful tightness in the near-term, noting that a slowdown in Indian consumption will free up some supply.

India imported $2.9 billion of gold and silver in July, down a third from the same period a year earlier, according to Reuters.

Watch Out for Tapering

Another headwind for gold, according to some gold bears, is the U.S. Federal Reserve scaling back its monthly bond buying program, which will likely result in higher Treasury yields, dampening the attractiveness of gold -- an asset which pays neither interest nor dividends.

"For the moment, with the Fed remaining concerned about low inflation and therefore keeping asset purchases in place, bond yields are likely to move lower in the short term, supporting gold's move higher. Ultimately, we still expect the program to be tapered off by year end and we believe this will most certainly result in a weaker gold price," Daniel Hynes, head of commodity strategy, at CIMB wrote in a research report.

"The days of a bull run in gold are over," he said.

But Peter Elston, head of Asia Pacific strategy and asset allocation at Aberdeen Asset Management, disagrees the end of U.S. monetary stimulus will be negative for gold.

"The big question is [how] all this extraordinary loose monetary policy is going to end. The likelihood is: it's going to be a crash [back into deflation] or inflation taking off. Both of which will be good for gold. If we have deflation, that's going to mean more central bank support," Elston said.

"You are getting to the point where gold is starting to look interesting again," he said.

More on Gold from CNBC
-By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H

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I will continue to invest in

August 14 2013 at 10:17 PM Report abuse +1 rate up rate down Reply

A bunch of fearful investors who bought gold so that when the economy collapsed they could barter away are stuck with it. They are afraid to sell because they just know that those government drones and black helicopters are coming for them. Sell your gold, take your loss.

August 14 2013 at 10:45 AM Report abuse rate up rate down Reply

Ahhh, the misinformation about gold's supposed impending bust continues, as the behavior of the market clearly indicates otherwise.

August 14 2013 at 9:29 AM Report abuse -1 rate up rate down Reply

Give me stocks any day. Gold is far more speculative. Both gold and stocks would be worhless in a complete economic meltdown (You can't eat gold, bonds or stock certificates. People will want clean water, food, etc.). Investing in guns would be a better bet for that scenario. As a long term investment, gold has proven to be a worse than good quality bonds which are a poor second to stocks. Gold is still overpriced. Wait until it is $600-700 again and then don't invest more than 5% of your liquid net worth if you must have some.

August 14 2013 at 12:04 AM Report abuse -1 rate up rate down Reply
1 reply to Nestor's comment

You generate capital by investing in higher risk ventures. Economic meltdowns in Asia proved that gems and valuable metals provide security; in a "complete economic meltdown" cash will be worthless since it will have no value.

August 14 2013 at 12:42 AM Report abuse -1 rate up rate down Reply

This smells like a pump and dump by the hoarders

August 13 2013 at 1:50 PM Report abuse +2 rate up rate down Reply
1 reply to mgh406's comment

Gold? Tangible items cannot be hyped to the same extent as worthless investments. Gold will always have a value in some cultures, and those cultures will generate sufficient worldwide demand for its exploration and processing.

August 14 2013 at 12:45 AM Report abuse +1 rate up rate down Reply

never buy HIGH. always buy LOW and sell high...see a drop in the price coming real soon and the gold hoarders are not going to be happy.

August 13 2013 at 1:22 PM Report abuse +3 rate up rate down Reply
1 reply to stevendy1's comment

The price goes down only when there is no demand. Using your logic, why would anybody sell gold at a loss, when by holding it, the prices can be manipulated in an upward direction, long-term.

August 14 2013 at 12:48 AM Report abuse rate up rate down Reply

The market for gold and other precious metals is rigged in favor of the big players. It's best for the little guy to avoid this game lest he forfeits all.

August 13 2013 at 12:00 PM Report abuse +2 rate up rate down Reply
1 reply to rgkarasiewicz's comment

How do you define "big players"? If you invest using options, puts and calls, you may lose a fortune overnight; if you own stocks or mutual funds your opportunity to win or lose is identical with the large investment houses.

August 14 2013 at 12:50 AM Report abuse +1 rate up rate down Reply