Why gold is up today: Gold prices on Tuesday morning staged the biggest advance since mid-October. Gold prices ended Tuesday's session sharply higher, hitting a three-week high. February gold gained $28, or 1.5%, at $1,262.20 an ounce. Spot gold added $22.70 to reach $1,263.50 an ounce.
Before Tuesday's climb, gold had slipped 26.2% in 2013.
Goosing gold prices on Tuesday were a number of factors:
- As the dollar continued to weaken, gold's appeal brightened. The Bloomberg U.S. Dollar Index headed for a fourth consecutive loss Tuesday, the longest slump in 60 days.
- Short covering also helped. Some traders moved to cover short bets that increased 6.2% to 79,631 positions last week, just 0.6% shy of the record reached in July, according to data from the U.S. Commodity Futures Trading Commission. Prompting the short covering was growing speculation the Federal Reverse will reiterate at its Dec. 17-18 meeting that U.S. interest rates will remain low even though taper could be on the table.
- Comments from European Central Bank president Mario Draghi also gave gold prices a lift. Draghi said Tuesday that while Eurozone inflation is very low and is expected to stay low for a good while, the region is not headed for a deflationary debacle like Japan. That suggests the ECB will keep its ultra-loose monetary policies in place for an extended period of time.
- Bargain hunters appear to be stepping in amid hopes gold prices are nearing a bottom. Last week, gold gave back 1.6% to $1,229 an ounce as some investors lost faith in the precious metal as a store of value as taper talks grow. A spate of encouraging economic data last week included a better than expected November jobs report, robust factory activity data, and upwardly revised gross domestic product figures. Quantitative easing (QE) has unquestionably been a cushion and catalyst for gold. In the fall of 2011, amid the U.S. Federal Reserve's second round of QE, gold soared to its peak of nearly $1,900 an ounce.
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Gold has been one of the worst-performing commodities of the year.
"There are a combination of factors that have been weighing on gold for some time," Money Morning Global Resources Specialist Peter Krauth told us this week. "The current bear cycle that started after gold peaked above $1,900 in Sept. 2011 is not over. I believe this is a long consolidation/correction with a much larger secular bull market."
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Gold gave back 5.4% in November, its biggest monthly loss since June. Last month's forfeiture marked the yellow metal's third consecutive month of declines.
Year to date, gold is off 26.2% and on track for its first annual loss since 2000. 2013 will go on the books as gold's worst year since the steep 32.5% retreat in 1981. Last week's close of $1,222.30 left gold near its 52-week low of $1,211.40.
"The run up previous to that lasted from 2001-2011 uninterrupted, so even three full years of consolidating/correcting should not be a surprise," said Krauth. "Gold could remain weak for the next 10-12 months, and this would still be within historical norms for a correction."
Krauth said changes in Asia have also triggered lower gold prices - for now.
"India's been the world's largest gold buyer for a long time. But a high trade deficit and weak rupee caused the government to impose a series of measures, like import duties that have climbed to 15% this year alone," said Krauth. "Indian gold purchases have slumped."
Finally, soaring markets have captured money that's flowed out of precious metals.
This year, the Dow is up 22.3%, the S&P 500 has added 26.8%, and the Nasdaq has soared 34.7%.
Despite a number of obstacles in gold's path near term, Krauth reiterates the long-term bullish outlook.
"I remain staunchly bullish on gold, and expect it will eventually resume its bull market behavior once this consolidation/correction has played itself out," said Krauth. "As Jim Rogers often points out, gold fell by 50% in the mid-70s, only to head 850% higher afterwards."
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