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Is the love lost for gold returning?

Thursday, 1 Aug 2013 | 10:29 AM ET
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Gold prices, which have spent most of the year heading south, have been steadily creeping higher since late June, raising expectations that the worst may be over for the battered precious metal.

"Gold has got back some of the love lost with increased fund flows from traders trading on a further rise in prices," Kelly Teoh, market strategist at trading firm IG, said in a note.

The precious metal was trading at around $1,313 an ounce on Thursday afternoon in London, up 11 percent from its June low, but still down about 20 percent from where it ended last year.

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"Although the year-to-date performance is still dire, buyers have flocked back into the market with reports that hedge fund managers have increased trades on a further rally in gold," Teoh said.

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According to Teoh, over the past 20 years the pullback in gold prices has, on average, been under 10 percent. But between October last year and late June, gold prices slumped by 35 percent - a move that caught many investors by surprise and which Teoh said probably supports the view that the sell-off was overdone.

The recovery in gold prices has been supported by an easing of expectations that U.S. monetary stimulus could be unwound sooner rather than later.

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The Federal Reserve's asset purchase program has underpinned gold prices in recent years because it has kept interest rates low, which in turn has weighed on the dollar and made assets priced in the U.S. currency cheaper for foreign investors.

"I think we have seen the worst of the sell-off in gold," said Jonathan Barratt, founder of the commodities newsletter Barratt Bulletin, in Sydney. "Whilst the (U.S. monetary) stimulus stays in place, the dollar will be weaker and that's good for gold."

There have been heavy outflows from gold-backed exchange-traded funds (ETF) over the last few months, but New York's SPDR Gold Shares - the world's largest gold ETF - said holdings were unchanged for a fifth day on Wednesday.

If the ETF outflows come to an end, one key factor undermining gold prices would be taken away, analysts said.

(Read More: Critical day for gold)

"We hold the view that gold prices have broken out of the downtrend. Our short-term view is that it has to stay above $1,327, with an immediate target price of $1,370," said IG's Teoh.

Barratt agreed, adding that he was looking for a move to $1,375 and then $1,400 over the next month or two.

Rich Ilczyszyn, founder and chief market strategist at iiTrader, wrote on CNBC earlier this week that a close above the $1,340.90 would provide gold with positive momentum.

— By CNBC.com's Dhara Ranasinghe; follow her onTwitter @DharaCNBC

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