Are Gold and Silver Waiting on Another Catalyst?

Last week, gold futures for December delivery increased 3.6%, while silver futures gained 5.1%.  The catalyst for the gains came from central banks agreeing to make dollar borrowing cheaper for the euro zone.  Currently, gold and silver are holding onto gains as investors wait for another catalyst.

Investor Insights: Why is Gold Finding Support At This Level?

On Monday, investors received more promises from Europe.  German chancellor Angela Merkel and French president Nicolas Sarkozy announced they had reached an agreement on a plan to provide a new treaty to resolve the euro zone debacle.  In a press conference, Nicolas Sarkozy said, “Things cannot continue as they have done up until today.  Our preference is for a treaty among the 27 EU members, so that nobody feels excluded, but we are open to a treaty among the 17 euro members, open to any state that wants to join us.”  The treaty would include sanctions to keep deficits below 3% of GDP and a constitutional rule to move budgets towards equilibrium.  Sarkozy also said, “We want to make sure that the imbalances which led to the situation in the euro zone today cannot happen again.”  While it may be nice to see plans being discussed, investors should keep in mind that actual implementation often eludes the euro zone.

The latest Commitment of Traders report, which details positions as of November 29, shows that investors are being cautious on gold.  Non-Commercial positions, which are the large speculators, decreased their longs by 8,035 contracts.  This brought the total Non-Commercial category to 186,031 contracts.  For comparison, when gold was hitting September lows around $1,600 per ounce, the non-commercial long position totaled 181,723 contracts.  The Commercial positions, which include hedgers and producers, also decreased by 18,169 contracts.  However, Commercial shorts covered nearly all of these contracts (17,037).  The fact that shorts are covering positions and speculators are remaining tame, paints a bullish picture in gold.  If speculators come back into gold, which I believe they will, it will boost prices.  The key question is, what are speculators waiting on?

Even though the Federal Reserve has promised record low interest rates till mid-2013 and lowered dollar cost funding to Europe, speculators may be waiting on the next big quantitative easing announcement before jumping back into gold.  In a JP Morgan Fixed Income Markets Investor Survey, 80% of those polled expect QE3 next year. Furthermore, 52% of respondents believe ratings agencies will lower the US sovereign rating by one for more notches by the end of 2012.  Either one of these outcomes could provide a catalyst for $2,000 gold, as it would give speculators a large reason to rush back into gold.  For individual investors, the key is to get into precious metals before the speculators drive large price increases.

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