After rallying to a record high of $1,257/toz on June 18, USD-denominated gold prices fell on the back of a sell-off in speculative futures positions and gold-ETF holdings. Although the sell-off in speculative positions might not be surprising given the rise to a record-high price and decreased concerns over European sovereign debt following the European bank stress tests, it stands in sharp contrast to the movements in US real interest rates, which have fallen to a decade low. As discussed in our June 17, 2010, Precious Metals Update: Low US rates, high European debt send gold prices to record highs, COMEX gold market positioning tends to reflect US real interest rates, with low US rates driving a high level of net speculative length in gold futures. Consequently, the recent decline in gold net speculative length, even as 10-year US TIPS yields fell below 1.00%, suggests that the gold market is now oversold, and we expect increasing speculative long positions to carry gold prices back toward our 6-month COMEX gold price forecast of $1,300/toz. Further, our US economists recently lowered their US growth outlook for 2011, with the implication that the US Federal Reserve is more likely to keep short-term US interest rates low through 2011, providing further upside support to gold prices and raising upside risks to our current gold price forecasts. In addition, our US economics team also expects that the US Federal Reserve will return to quantitative easing measures in late 2010 or early 2011. We believe that a return to quantitative easing could act as a strong catalyst to carry gold prices to higher levels.

David Fuller's view Although the analysis in this report is mainly US-centric and gold is now a very international market, I see nothing to disagree with in the Goldman Sachs report. Gold (p&f, monthly, weekly & daily) appears to have completed a small, five-week correction towards its trend mean represented by the 200-day moving average. Its generally steady performance during a period of turbulence for many markets and the impressive secular uptrend are very reassuring for investors. Seasonal factors improve from next month through at least 1Q 2011. Only gold phobes now deny that the yellow metal is a hard money currency in an era destined to be remembered for its unprecedented printing of all fiat currencies.

The main long-term risk for gold is substantially higher interest rates at some point, although this is very unlikely to be a short-term or even medium-term prospect. The price of gold would also be vulnerable during another global stock market panic, as we last saw in 2008, although it would most likely still show relative strength and recover more quickly than most other assets. The gold price will always fluctuate in line with market sentiment but a close beneath the July reaction low near $1155 and the rising MA would be required to signal a deeper correction before the secular bull trend is extended.