Gold Outlook for Q4: Buy or Beware?

Gold prices rose over $100 an ounce for the third-quarter settling at $1,622.30.

Gold prices rose over $100 an ounce for the third-quarter settling at $1,622.30. The 6.5% gain was no easy ride for investors who saw prices north of $1900 just last month. The turbulence has refueled debate over the precious metal’s stature as a safe haven investment, with many viewing the September 10% sell-off as a sign the bubble burst. Alix Steel, reporter covering the metals beat for TheStreet.com, couldn’t disagree more.

“Prices are broken, you definitely can see that, but I don’t think the bubble has burst here,” she says. Steel points out that the most recent rally in gold has spanned over two-years, and the last two-months alone have seen prices jump over $300 an ounce. “Prices have a right to come off,” she says, expecting volatility to persist in the fourth quarter.

“I don’t think we’re going to see a huge rally right off the bat. I think we’re going to have a period of consolidation,” she says. However, her ear is to the wall on the gold trade and she’s still hearing calls from traders that have gold rebounding by year-end up to levels between $1,800 – $2,000 an ounce.

Steel explains that demand driving the precious metal higher is not Western centric. Here, we see gold action influenced more by technical levels, whereby a consolidation move could be easily fueled into a major correction or crash. But what’s easily forgotten is the strength in Asian demand. “India could be importing a thousand tons of gold this year,” says Steel. As her sources explain, there’s rampant buying there sending premiums up “gangbusters.” And of course there’s China, a key demand player that has gone from net neutral to a positive demand effect of 300 tons per years according the World Gold Council. China accounted for 6% of total global demand in 2000 and rose to 18% in 2010.

Two more catalysts in Steel’s bullish view are central bank buying and negative real interest rates. According to the World Gold Council, central banks imported 198.4 tons of gold in the first half of 2011 versus two years ago, they were selling 450 tons a year.

Of course, any gold outlook that doesn’t address currency would be remiss. As Europe continues to sort through it’s debt crisis, we’ll likely see more currency fluctuations. The more instability in the EU, the faster the flight to safety into the US dollar becomes.

“We saw the Euro basically start to collapse… and yet investors fled to the dollar of all things, which the gold bugs say shouldn’t happen,” says Breakout’s Jeff Macke. Macke, who exited his gold position in the (GLD) in August explains, “shouldn’t, wouldn’t, couldn’t are bad words in investing, because what happened was people buying treasuries, people buying the dollar which has been strong even as gold collapsed.”

For long-term investors, the moves we’ve seen recently still don’t deter the fundamentals, according to Steel. She believes the recent gold trade was a margin call story, not a fundamental change, making gold prices much more attractive for Q4 than they were two weeks ago.

As for what to look for before you buy into the gold weakness, Steel says “you want a steady rise. Once you see a steady rise start to happen in a more methodical way, that’s a safer place to buy rather than just a spike up.”

Source Yahoo FInance

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