Gold's Rebound: Why It Appears Believable This Time

An employee returns a box of one kilogram gold bars to the safe from Swiss manufacturer Argor Hebaeus SA, in this arranged photograph at the Hungarian bullion dealers AranyPiac in Budapest, Hungary, on Monday, June 17, 2013. Hedge funds cut wagers on a gold rally for the first time in three weeks on mounting speculation central banks will curb record stimulus and as this year's slump in bullion spurred losses for billionaire John Paulson. Photographer: Akos Stiller/Bloomberg via Getty Images
Akos Stiller/Bloomberg via Getty Images

By Ansuya Harjani

As investors shun risk assets such as emerging market equities and currencies, gold is quietly gaining traction, clawing its way back up to the $1,400 level.

The strength of bullion amid growing expectations for the U.S. central bank to scale back its bond buying program in September is a sign that a solid base may have formed in the yellow metal, say strategists.

"If tapering does occur in September, it will be more 'buy the rumor, sell the fact.' Certainly the entire market is expecting it already. We'll see gold prices continue to rise quite strongly over the next couple of months," said Andrew Su, CEO of Compass Global Markets.

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"The reaction to [Fed] minutes was lackluster, under most circumstances you would have gold prices to fall a lot more, and they haven't. That reflects the strong buying and heavy interest in gold particularly out of Asia," Su, who expects gold to cross $1,400 over the next week, added. Gold has risen 11.5 percent since July, erasing some of the hefty losses seen in the first six months of the year.

According to the Federal Reserve's July minutes, officials thought it would soon be time to slow the pace of the bond buying "somewhat," but some counseled patience.

Kelly Teoh, market strategist at IG Markets who believes the upside in gold has legs, said investors are moving into the precious metal because Asian currencies are under tremendous pressure.

"If you look at all the various asset classes, the U.S. equities are at all-time highs, Asian ex-Japan equities are lagging, commodities is the only asset class that's underperformed so I see value in that," she added.

Barclays' chief technical strategist Dhiren Sarin says gold has either already formed, or is in the process, of establishing a "very strong base."

"We are bullish in the medium to long term. Short term, we potentially see a pullback as the U.S. dollar is catching a strong bid, which could undermine gold in the near term," he said.

Sarin recommends buying gold on pullbacks, noting that September is seasonally the most bullish period for gold. Looking at the yellow metal's performance since the 1960s, median returns for gold are approximately 2 percent during the month, far outpacing any other month of the year, he said.

"In the coming years though, we believe gold has stronger upside potential towards the average levels of 2012, near $1,700, though this will likely evolve next year," he said.

David McAlvany, CEO, McAlvany Financial Group agrees the longer-term prospects for gold are bullish, pointing to possible supply constraints over the coming months.

"We're already dealing with projects that are being scuttled in Africa -- because you're dealing with a cost of production which is $200-300 above the current price," he said.

"You would have to move to 2014 for that to have a real positive supply-demand benefit in terms of the price, but you may see that by the mid-year [2014]," he added.

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