An abatement in the wave of speculative selling pressure is allowing strong demand for physical gold (COMEX:GCU13) from Asian buyers to assert its influence over the price and there is a growing case to be positive over the prospects of the yellow metal.
However, a number of factors have hurt gold in recent months, not least position liquidation by star traders George Soros and John Paulson. But those are short-term influences. The elephant in the room for gold continues to be the U.S. Federal Reserve's plans to taper its $85 billion a month bond purchasing program.
The real questions remains whether the U.S. economy is strong enough to withstand its withdrawal, an assumption that is yet to be fully tested. However, bond yields have been rising in anticipation of this event, which increases the cost of credit to the real economy.
Now for the bullish case for gold. With September barely two weeks away there are already possible signs that the Eurozone crisis is resurfacing with German finance minister Wolfgang Schaeuble talking about another Greek bailout. If that revives concerns over the health of peripheral economies and hence the survival of the euro, it could create a search for 'end of the world' type insurance offered by assets such as gold.
Indeed, if the word 'crisis' starts to dominate headlines again, which will sap economic confidence generally, it could see the Fed reconsider reining in its bond buying program, especially if inflation is weak. If it were to carry on, that would be great news for gold and could be enough to bring speculators piling back into the metal via exchange traded funds (ETFs).
Gold's short-term outlook positive
But bulls not fully back in control
However, with many of the weak longs out of the way and despite a slower pace of central bank buying gold's recovery could carry on into October due to seasonal factors and ongoing Asian demand. A sustained rise above $1,400 per troy oz will see many momentum players wanting to ride gold on the upside.
But scaling old highs of $1,921 last seen in September 2011 will take considerable momentum ranging from a burst of inflation – seems unlikely in the short- to medium-term – through to an extension of central bank liquidity programs possibly in a bid to counteract weakening economic growth or a return to the financial crisis.
Therefore attention will remain firmly focussed on the Fed for any clues over its tapering intentions.
But as the old saying goes all markets when they start to rally or resume an old one climb a wall of worry.