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Medium-Term Outlook for Gold? Still Bullish

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The long-awaited rally will likely begin soon.

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There are a lot of words in the dictionary to describe what you need these days in order to be a gold investor -- patience, endurance, and fortitude are some of them. Recently investors were beginning to lose their staying power. But in the past, it has often worked out that just as investors' patience runs out, gold comes charging in.

Sentiment toward gold is so low that it is scraping the floor. Two weeks ago, gold exchange-traded funds suffered their largest outflow since January 2011 with gold falling on Friday as low as $1572.80. The world's largest gold-backed exchange-traded fund, SPDR Gold Trust (NYSEARCA:GLD), reported its fourth successive daily outflow last Monday. The sell-off since the start of the year is mostly due to a perceived improvement in the global economic outlook and concerns on the longevity of the Fed's quantitative easing.

Comments by top Fed officials made two weeks ago, suggesting the US central bank could reduce or halt its asset buying, had put heavy pressure on gold prices. Also two weeks ago, data released by the Commodity Futures Trading Commission showed hedge funds and other investment managers were shorting gold in record numbers. The number of bearish contracts held by professional speculators reached above 90,000 for the first time since mid-1999. It is ironic to juxtapose that with the rosy picture 10 years ago this month when the number of bullish contracts held by professional speculators first broke above 100,000 contracts.

Investors without the qualities mentioned above -- patience, endurance and fortitude -- have already been shaken out of the market. The pool of sellers is dwindling into a pond.

Forbes magazine ran an interesting piece this week quoting a Time magazine article: "To hoarders and speculators gold lately has had about as much luster as a rusty tin can."

The article itself is a bit rusty. The Great Gold Bust ran in August 1976 right at the bottom of a 50% retreat in the 1970s gold bull market. It had been only 19 months since gold purchases became legal for US citizens and, according to the article, "the price has fallen more than 40% from its peak of $198 an ounce. In three chaotic days of trading last week, gold fell $14 on the London market, reaching a 31-month low of $105.50 an ounce. Though the price recovered to $111 by week's end, that is still a dismal figure for gold bugs, who not long ago were forecasting prices of $300."

Wow. $300. It's almost funny to read today.

It's often when sentiment is at its nadir that gold becomes turbocharged. After the Times article, gold proceeded to gain 750% over the next three and a half years.

Gold looked very good last Tuesday when it posted the biggest gain of the year, up 1.3%, on Ben Bernanke's reassurance of continued monetary accommodation combined with Italy's uncertain political and economic future. Gold broke above $1,600 an ounce, extending its rally to a fourth straight day. Italy's problems raise uncertainty about the viability of Europe's single currency. The unemployment rates for youths in Spain, Portugal, and Greece are approaching 50% and that may spell trouble this summer. Italian elections failed to show a clear winner indicating that voters reproached the present government's austerity measures. It also suggests political instability in Italy in the coming months. Flight-to-safety buying of US Treasuries, German bunds, gold, and the US dollar became the thing to do. Bernanke delivered the central bank's semiannual testimony to the Senate Banking Committee sending a strong signal that he backed the continuation of the $85 billion bond-buying program.
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No positions in stocks mentioned.
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