Gold Breakout Watch: Another Bullish Trend On The Way?

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on Aug 20, 2012

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Gold Breakout Watch: Another Bullish Trend On The Way?

A recent article in the Telegraph discussed the likely picture for gold in the coming weeks, and the effects that active buying by the official sector and increased interest from China may have on the industry.

Gold has been traded in a $1550 to $1620 range over the past few months, leaving bullish and bearish investors cancelling each other out over that period. But with the gold price nearing the top of the range and some analysts predicting a breakout in the coming weeks, things may go in the bulls’ favour.
Expectations for a breakout are not unreasonable. Last Friday, Bloomberg released a poll of gold analysts that showed they are mostly bullish on pricing prospects for the next six weeks. The majority (14) of the 26 experts surveyed by Bloomberg expected prices to rise this week. Six predicted a fall and the rest of the participants in the survey predicted neutral price action.

!m[](/uploads/story/269/thumbs/pic1_inline.png)The increased interest of both George Soros and John Paulson towards gold may also point to an upcoming breakout. Last week there was news that both Soros and Paulson had increased their stake in the world’s largest publicly traded physical gold exchange traded fund (ETF) – SPDR Gold Trust. Mr. Soros bought additional shares to increase his stake to 884,400 shares (from the 319,550 he had previously owned), while Paulson bought 4.53 million shares, increasing his stake to 21.3 million.

In term of money spent these are big investments that hint that there is serious thought behind them. At $156 per share, Mr. Soros and Mr. Paulson have spent on new gold investments $88 million and over $700 million respectively.
The Telegraph reminds that Mr. Soros’ forecasts in regard to gold haven’t always been either accurate or stable, referring to a statement made by Soros at Davos in 2010. Back then Soros said that “The ultimate asset bubble is gold”. Also, Mr. Paulson’s fund has been having financial difficulties this year, registering substantial losses. But even with these factors taken into an account, such commitment to gold from two of the world’s most influential financial heavyweights is hard to be neglected.

And while the bulls have every right to expect the market to go their way, the more bearish investors seem to be in a tight situation. There hasn’t been much to support expectation for a bearish trend lately. The only positive news for them came from the World Gold Council (WGC) and its latest demand trend report, covering the second quarter of the year.

It becomes clear from the report that the total gold demand for that period has decreased by 7 percent to 990 tonnes on a year-on-year basis and by 10 percent quarter-on-quarter.
There was also a 5 percent decrease in gold demand for the first half of 2012 compared to the same period of the previous year. However, the demand of 2,098.8 tonnes was still 14 percent above the five-year average.
Bulls can also find support in the increased demand from the official sector and China, with both currently active buyers on the market. In this quarter alone the official sector increased its gold reserves by 157.5 tonnes, which is the largest quarterly purchase by the sector to date.
And then there is China. The Asian giant has a lot of its reserves in US dollars ($1.2 trillion according to U.S. treasury data), but it has been speculated for a long time that the country seeks more diversity in that respect. Buying gold seems to be a major part of the strategy towards achieving this goal. And with China’s growing appetite gold equities might be looking interesting once again.