Gold Market Giving Off Mixed Signals

Investors are getting confusing signals from the gold (NYSEARCA:GLD) market. While gold closed at a record high of $1,900.23 per ounce on September 5, it ended out the year down 18% from that peak at $1,563.70 per ounce. But even with that ending price, gold gained 10% in 2011, capping off its longest winning streak with its 11th consecutive annual gain.

Billionaire George Soros cut 99% of his gold holdings in the first quarter of 2011, according to Securities and Exchange Commission data, even though he once referred to it as the “ultimate asset bubble”. Other professionals are sending varying signals on the rally as well, even though gold prices have risen by a factor of six since 2001. Hedge fund manager John Paulson sold gold in 2011 as well. A Bloomberg survey of 44 traders and analysts gave a median estimate for prices to rally at most at 37%, to $2,140 per ounce in 2012. Toronto based Martin Murenbeeld, chief economist for DundeeWealth, which manages Dynamic Mutual Funds, predicts that “Gold is going to go much higher, but it’s not going to go in a straight line. Gold has given positive returns, but it doesn’t necessarily do it in a way that gives comfort, and that makes people nervous.”.

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Because the European debt crisis widened and the U.S. Federal Reserve intends to keep interest rates near zero until at least mid-2013, demand for gold has been reinforced. Additionally, since more debt reduces the interest rates on bonds, the larger return on bullion is even more attractive, making it more apparent that “the longer term trends, mainly government fiscal and monetary policies haven’t changed,” noted Midas Funds President Tom Winmill.

Other notable gold sellers in 2011 were Paulson, selling 36% of its holdings, and Soros Fund Management, selling virtually all of its SPDR Gold Trust (NYSEARCA:GLD) shares. Summing up the year, Michael Cuggino, a manager at Permanent Portfolio Funds in San Francisco, says that “Gold is all over the place. If you bought gold at $1,800, then you aren’t very happy. Some people will get out of gold, but the longer-term investors will remain.

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