Will Mideast Turmoil Hoist Gold to a New High?

Gold bugs love bad news, and civil war in Libya, Africa's third-largest oil producer, couldn't have come at a better time. The pickup in the global economy and specter of central bank rate hikes helped knock the yellow metal off its lofty pedestal early in the year. Gold futures traded on the Comex division of the New York Mercantile Exchange (CME) lost more than a hundred bucks an ounce in January, and the precious metal looked like it was going into a full-blown correction.

As we said back when gold prices were on the way down, what a difference a month makes -- and now the same holds true on the way back up. Uprisings in Tunisia, Egypt and Libya -- and the potential for unrest in Bahrain, Algeria and (gulp) Saudi Arabia -- have pushed the price of gold back within striking distance of nominal all-time highs.

With oil bouncing around near $100 a barrel in New York trading and the Dow Jones Industrial Average ($INDU) off more than 350 points in just three days, it appears that the flight to safety in gold is back on.

Comex gold has rallied about 6% in February so far, closing at more than $1,415 an ounce Thursday. That's the highest gold prices have been in seven weeks. Tack on another $15 to $16 an ounce -- or a bit more than a 1% gain -- and gold will be back at the all-time record levels set back in early December (not adjusted for inflation, that is). See the chart below.

Gold prices were essentially unchanged Thursday, putting a run on the record on hold, but it may be just a matter of time if market sentiment is any indicator. Recall that sentiment is a contrarian indicator: When market participants are bearish, the next move in prices tends to be bullish (the idea being that all the sellers have sold).

It turns out that sentiment among professional gold traders looking to time the market is pretty dour -- and they appear to be sitting on lots of cash, according to the Hulbert Gold Newsletter Sentiment Index. Traders recommend allocating just about 45% of a portfolio to gold at these levels, according the the index. That means more than 50% should be sitting in cash, waiting to pounce.

That suggests that a lot of buying power is still sitting on the sidelines of this most recent gold rush.

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