Tuesday, August 23, 2011

Gold Tops $1,900, Then Pulls Back .



LONDON—The spot price of gold rose above $1,900 to yet another intraday record, but then gave up the day's gains and more, as the metal's moves become increasingly wild.

Spot gold rallied to a new record high at $1,912.29 an ounce in early European trade, after briefly breaking $1,900 an ounce during Monday trade. However, gains quickly eroded, and the price was down $19.80, or 1%, to $1,878.30 an ounce ahead of the New York day..

While global economic conditions all seem to point to a continued gold uptrend, some market players are becoming nervous of rising volatility in the metal's price.

"Prices are all over the place, and moving fast," said a London-based trader. "Overall, we're still in a strong bull market, but with volatility increasing and market conditions thin, it is easy to get blown out of the water."

Swiss Bank UBS echoed this view. While it upped its gold price forecast Tuesday, it also cautioned that a correction to the market's impressive rally looks increasingly likely.

Less than three weeks since it last revised its price forecast, the bank said it now sees one-month gold at $1,950 an ounce, up from $1,725 an ounce previously, and three-month gold at $2,100 an ounce, from $1,850 an ounce previously.

"But we want to stress that predicting price levels for gold has become a difficult exercise. No sooner are forecasts revised than gold targets new records, somewhat like the palladium market in 2010," said UBS analyst Edel Tully. "We think gold has enough momentum currently to travel north of $2,000 an ounce before year-end, but we caution that some volatile price moves—both to the upside and the downside—lie ahead."

For some, though, gold's ride higher has proved a little too wild.

In his widely-read daily letter, independent financial markets commentator Dennis Gartman announced Tuesday his firm's decision to sell some of its gold holdings amid "scary" market conditions.

"Gold has reached that point where it moves $40-$50/ounce in a moment's notice," he said in his daily Gartman Letter. "That is not an investment that is safe, indeed it is far from safe; it is violent."

According to his note, Mr. Gartman has reduced his holdings by one unit each of gold in euro and sterling terms, leaving a slightly-reduced non-dollar position in the metal.

Investors have become increasingly worried about the health of the global economy this month, which has increased the allure of gold. Financial markets this week are focused on Friday's speech by U.S. Federal Reserve Chairman Ben Bernanke at an annual symposium at Jackson Hole, Wyo. Mr. Bernanke is expected to shed light on the Fed's stance toward a third round of quantitative easing, or "QE3," a dollar-diluting policy that has played a key role in gold's recent ascent.

But while news of a third round of stimulus would almost certainly send gold higher, if QE3 is kept off the table, gold could suffer a heavy slide, having partially priced in an affirmative announcement, said a trader.

"The market seems to have the perception that Fed will wave its magic wand," the trader said. "Gold wants to hit $2,000 an ounce, but I think a lot hangs on what happens this weekend," he said.

Among other precious metals, spot silver fell 86 cents, or 2%, to $42.86 an ounce, spot platinum was down $15, or 0.8%, at $1,886 an ounce and spot palladium was off $1, or 0.1%, at at $760 an ounce.

Write to Francesca Freeman at francesca.freeman@dowjones.com

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