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Gold prices fought back after Wednesday's fall as Washington appeared closer to making a deal to avert the looming fiscal cliff. Talks continued between the two sides and there was hope a resolution could be made by year's end.
Carlos Sanchez, director of asset management with CPM Group, said the longer investors have to wait for a deal, the more likely gold prices will rise.
He said to Kitco, "Uncertainty will support gold prices, while a resolution will bring prices down. We can see gold prices heading higher for the next week or two, rising to $1,780-$1,800."
Other analysts see higher gold prices regardless of the fiscal cliff outcome.
Economist Intelligence Unit's Caroline Bain said to Reuters, "It could be positive for gold whichever way the negotiations go, but a rally on a speedy resolution might be quite a short-term positive, whereas any risk of prolonged sovereign stress could be a longer-lasting positive."
The Other Factors Fueling Higher Gold Prices
Looking ahead, there's reason to believe the bulls will stick around in this last month of 2012 and the start of the New Year.
First, money managers have already made bullish bets.
In the week ending Nov. 20, they grew bullish on Comex gold according to Commodity Futures Trading Commission data.
Managed funds, betting that gold prices will rise, added 6,926 long gold positions while cutting 1,542 short positions.
These actions had their net position rising 6% to 148,630 long contracts, up from 140,162 contracts.
Then we have the upcoming December FOMC Meeting scheduled for Dec. 11 and 12, telling us if they year will end with news of an additional stimulus (Q4).
The Wall Street Journal on Wednesday predicted more stimulus from the Fed, and Goldman Sachs followed on Thursday.
Bart Melek, head of commodity strategy for TD Securities said to Kitco, "We fully expect the expiring Operation Twist program will be replaced with an unsterilized longer-term bond purchase program, which we think will be very conducive to higher gold prices."
What Rattled Gold Prices Midweek
Earlier this week, gold was the victim of a fluke trade in Wednesday's session that got rid of the metal's great gains last week.
A massive sell off took place after gold traders saw a large order for 7,800 contracts enter the Comex market at 8:20 am ET, reported Investor's Business Daily. The trade had been rumored to come from a large U.S. fund.
It resulted in a rush of sell orders after automatic stop losses had been triggered.
Short sellers responded by covering their positions and bargain hunters entered the market, pushing gold prices higher.
The dust appeared to settle by Thursday and in a UBS daily market note, analysts wrote, "We don't think anything has materially changed for gold. Essentially the metal is back to where it was trading last week. This is another test of downside buying interest but it also highlights the commitment issues that reside when the market attempts to climb higher."
February Comex gold was trading at $1,730.00 an ounce on Thursday with spot gold prices at $1,728.75.
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