Why Are Gold Traders More Bullish Than Ever?

Gold (NYSEARCA:GLD) traders and analysts are the most bullish they’ve been in at least seven years as investors accumulate the metal at the fastest pace since August as the European debt crisis pushes them to seek safe-haven investments.

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The results of a Bloomberg survey have 21 of 22 traders and analysts predicting bullion will rise on the Comex in New York next week, for the third consecutive increase and the highest proportion in data dating back to April 2004. Holdings in exchange-traded products backed by gold such as the SPDR Gold Trust (NYSEARCA:GLD) jumped by 27.5 metric tons this week, within 1% of the record set nearly three months ago.

Gold (NYSEARCA:GLD) surpassed the $1,800-mark for the first time in seven weeks on November 8, rebounding after tumbling as much as 20% over a three-week period in September, on demand for what is perceived to be one of the world’s safest assets. Meanwhile, yields on Greek and Italian bonds rose to euro-era highs this week.

“Throughout history gold has protected people from the sort of turmoil that we’re seeing,” said Mark O’Byrne, executive director of brokerage firm GoldCore Ltd. in Dublin. It’s “an important thing to own when there is this sort of volatility in stock markets and concern about currency devaluations.”

Gold is the third-best performer on the Standard & Poor’s GSCI Index of 24 commodities (NYSEARCA:RJI), behind gas oil and heating oil, climbing 24% to $1,768.50 an ounce this year. The commodities Index rose 4.9% this year, while the MSCI All-Country World Index of equities retreated 8.5% and Treasuries fell 8.6%.

The 27.5 tons of gold added to ETPs this week is the most since August 19. Investors bought 40.9 tons of gold this month, the most since July, pushing combined holdings to 2,312.1 tons valued at $131.5 billion, a number that exceeds the reserves of all but four central banks. The all-time record of 2,330 tons was set on August 18.

Gold prices slumped in September as a decline in equity markets forced some investors to cash out in order to cover those losses. When lobal stocks slipped to their lowest level in three weeks yesterday, gold again reversed.

The major risk is that a sharp decline in global stock markets will lead to renewed margin calls and fund liquidations,” said Adrian Day, president of Adrian Day Asset Management in Annapolis, Maryland. That may prompt “many managers to sell gold, a highly liquid asset.”

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Still, technical indicators suggest the rally that began in September could still have further to go, and eight of the 10 most-accurate forecasters tracked by Bloomberg over the past two years predicted that gold would reach $1,950 by the end of the first quarter of 2012.