Will Gold Crack the $1,000 Mark for Good?

Includes: GDX, GLD, UGL
by: Sam Subramanian

A 4.6% increase in the price of gold over the past three days has helped the precious metal to break out of its two month trading range of $930 to $970 an ounce. Gold for December delivery hit a six-month high of $999.50 an ounce today pushing the price close to the psychologically important $1,000 an ounce mark.

Gold Price ChartClick to enlarge

This is gold's third attempt to break the $1,000 an ounce barrier this year. While the previous attempts have failed, there are reasons why the third attempt could be successful.

  • Following a spectacular 52% advance from its March 6 lows, the S&P 500 has recently declined for four days in row. Investors' comfort with equities has eroded over the past few trading sessions. The CBOE Volatility Index (VIX) has vaulted as high as 29.57, an eight-week high. Equity investors are getting concerned that stock prices are leapfrogging an eventual economic recovery.
  • Investor sentiment on gold has not been particularly bullish of late. Mark Hulbert of Hulbert Financial Digest reports that gold market exposure recommended by a subset of short-term gold timing services is just 25%, well down from 61% in early June. As such, it is conceivable that investors are under-weighted in gold and may continue to pull monies out of equities to put them in gold.
  • Soaring budget deficits in the U.S. and U.K. are increasing investment demand for gold, more notably in Europe. Gold held in ETF Securities Ltd.'s exchange-traded commodities has risen to a record 7.99 million ounces. After some weeks of outflows, bullion holdings of SPDR Gold Shares (NYSEARCA:GLD) are starting to climb again.
  • Limiting supplies of the precious metal, central banks are restraining their sales of gold. The European Central Bank, the Swiss National Bank and Sweden's Riksbank have agreed to limit gold sales to less than 400 metric tons per year over the next five years.
  • The seasonal pattern favors gold. Coming just ahead of the surge in jewelry demand from the wedding season in India, September is often a strong month for gold.

What can go wrong with the above lines of reasoning? An up-tick in the U.S. dollar.

Upward moves in the price of gold have correlated quite well with declines in the U.S. dollar this year. And this is unlikely to change in the near-term. If economic data in the U.S. surprise to the upside and those from Europe to the downside, the dollar can pop hurting gold.

Given gold's impressive recent momentum and break-out of the trading range, the odds for a sustained downtrend look remote at least in the near-term. SPDR Gold Shares (GLD), Market Vectors Gold Miners (NYSEARCA:GDX), and ProShares Ultra Gold (NYSEARCA:UGL) are a few ways ETF and ETN investors can use to join the gold bugs. Mutual fund investors can look to Fidelity Select Gold (FSAGX), First Eagle Gold (FEGIX), and USAA Precious Metals & Minerals (USAGX).

Disclosure: I own shares in FSAGX, GDX, and USAGX. I do not have positions in other securities discussed.