Gold Price Jumps, Risk-Return Setup Improving

GOLD PRICE NEWS – The gold price climbed $18.19, or 1.1%, to $1,610.87 per ounce Tuesday morning as the U.S. dollar declined against a basket of the world’s leading currencies. Silver advanced alongside the the price of gold, by $0.57, or 2.0%, to $29.36 per ounce, as the commodities complex was bolstered by the weaker dollar.  Asian and European equity markets were largely in positive territory, while S&P 500 futures jumped 1.4% to 1,215.65

On Monday the gold price stabilized near $1,600 per ounce as the yellow metal consolidated following two consecutive weeks of significant losses.  The SPDR Gold Trust (GLD), a proxy for the gold price and the world’s largest gold ETF, dipped $0.36 to $154.87 per share.  The spot price of gold initially climbed to $1,610 after the death of North Korean leader Kim Jong-il was announced, which helped support safe haven demand for the yellow metal.  However, the gold price later relinquished its gains as the euro weakened against the U.S. dollar after European Central Bank President Mario Draghi warned of a deteriorating economic outlook for Europe.

Silver posted a more substantial loss than the gold price yesterday, as it dropped $0.90, or 3.0%, to $28.80 per ounce.  Other precious metals finished lower as well, with platinum sliding 0.6% to $1,414 per ounce and palladium falling 2.6% to $608.50 per ounce.  Cyclical commodities were mixed, as copper retreated 0.9% to $3.30 per pound while crude oil advanced 0.3% to $93.83 per barrel.

Gold stocks continued to the primary victim of weakness in the price of gold, as the AMEX Gold Bugs Index (HUI) tumbled 2.9% to 495.67 – its lowest closing level since June 16th of this year.  Eldorado Gold (EGO) was by far the sector’s worst performer on Monday, as it plummeted $2.04, or 13.6%, to $12.94 per share.  The sell-off in EGO stemmed from news that it plans to purchase European Goldfields (EGU.TSX), an emerging gold explorer in Europe, for C$2.5 billion in cash and stock.

The Eldorado-European Goldfields deal marks the latest in a growing trend of merger and acquisition activity in the gold space.  The vast majority of large-cap gold producers have struggled to provide gold price leverage to shareholders through organic growth, and have consequently turned toward acquiring their smaller peers instead.

With the current year winding down, Reuters polled 20 hedge fund managers, traders, and economists on their outlook for the price of gold in 2012.  Given the considerable sell-off in recent months, it was not surprising that most respondents were quite cautious on the yellow metal’s prospects for next year.  Nearly half predicted that the gold price will fall to $1,450 per ounce in the first quarter of 2012, and that gold is unlikely to reach a new all-time high until at least the third quarter.

Reuters cited “a lack of immediate monetary easing or stimulus programs by central banks” as the primary reason respondents were bearish on gold’s prospects in 2012.  Jeffrey Sherman, commodities portfolio manager at DoubleLine Capital, commented that “To me, gold is not attractive right now because we don’t see any inflation threats.”

The gloomy outlook of the Reuters poll echoed other recent measures of gold sentiment, including MarketVane’s Bullish Consensus reading.  At 58%, the MarketVane report came in at its lowest level since December 2008, immediately after the depths of the financial crisis.  Last week the Hulbert Gold Newsletter Sentiment Index (HGNSI) reached 0.3%, indicating that “the average gold timer is essentially keeping all of his gold-oriented portfolio out of the market,” according to HGNSI founder Mark Hulbert.

While the sentiment data reflects investors’ somber mood toward gold, a contrarian perspective indicates that now is far from the time to be turning bearish on the gold price.  Throughout the 11-year bull market in gold, extremely low sentiment levels – as witnessed currently – have been associated with intermediate-term bottoms in the price of the yellow metal.  Although it is quite difficult for investors to pick the exact bottom in the gold price, the data suggests that the risk-return setup for gold has become quite favorable at the present time.