By Christopher Vecchio, Junior Currency Analyst 26 August 2011 21:52 GMT 
Fundamental Forecast for Gold: Bullish
The spot price for Gold hit a record high of $1912.05/oz on Tuesday before falling sharply, as low as 1703.25, as investors unwound long positions and took profits amid tempered optimism that perhaps the global economy would be able to stagger along without falling into a recession. The declines in the second half of the week were exacerbated by the fact that the Chicago Mercantile and Shanghai Exchanges raised margin requirements on the precious metal by approximately 25 percent each, nudging smaller speculators and traders who recently hopped on the bandwagon out of the trade. The alternative currency was able to regain some strength on Thursday and Friday, pulling itself back up to a closing price of 1827.15. The rally to risk this past week was boosted mainly by optimism that Federal Reserve Chairman Ben Bernanke would signal another round of quantitative easing, or perhaps another form of stimulus to provide a crutch to an American economy that appears to be on its last legs of growth. Now that the speech at the Jackson Hole Economic Policy Symposium has passed, with no signal of further easing in the form of bond purchases, economic data will come back into the limelight now that risk sentiment can longer be carried by words. Looking ahead to the coming week, there are some events on the economic docket that could provide bullion will some renewed luster as market participants seek safe haven as the global economy continues to show signs of exhaustion. Early in the week, German inflation data is due, but is expected to show a slower pace of price pressures, following months of a higher interest rate. Now that inflation appears to be under, market participants will turn towards the fact that Europe appears to be on edge of not only a complete financial meltdown. On Tuesday, a reading of consumer confidence out of the United States is due, and while the print is expected to show improvement, a miss on the data could also boost gold; this scenario is unexpected, even if is in the realm of possibility. The key event on the week, however, is the U.S. nonfarm payrolls report for August. Economists have forecasted that recent data will show an increase of 75K in the labor market. Accordingly, economists expect the rate to remain at 9.1 percent. Forecasts for the nonfarm payrolls figure have been poor of recent, so a miss on the data could occur. That being said, there needs to be a substantial increase in the payrolls figure for confidence in the economy to be boosted; if not, precious metals will head higher as a way to preserve capital amid deteriorating economic conditions in the United States coupled with a weakening U.S. Dollar. Of course, one of the main drivers of gold, besides event risk, will be broader economic sentiment, as has been the driving factor behind the alternative currency’s appreciation in recent weeks. Markets seem to have found some levity the past week or so, as noted by riskier assets ticking higher; the truth of the matter remains that none of the underlying problems that caused the panic sell-off in risk at the beginning of August have been resolved. As investors come back to the market in the coming weeks – August is typically a slow month marked by lower volume – it is absolutely necessary for economic data to show signs of a turnaround from recent trends for gold to head lower. If not, which is what is expected – readings to show meager growth if any at all – gold, and other safe havens, will be boosted. –CV
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26 August 2011 21:52 GMT
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