Gold prices have risen the most in two weeks as investors seek a safe haven, but it's hard to tell whether today's gains signal a short-term bounce or continuation of the momentum that has driven prices up more than 25 percent so far this year.
Traders were liquidating positions last week ahead of today's options expiration and as the rollover continues from December futures into 2011 contracts.
But yesterday's late day rally continues today as concerns over Europe, North and South Korea and the U.S. economy push investors into this precious metal.
Credit markets are now focused on deficits in Spain and Portugal after Ireland's rescue package. Yet growing concern the bailout was really just "a hidden rescue of banks" not only in Ireland but in continental Europe is pervading the markets.
The euro/dollar continues to plummet, breaking below $1.34, a key support level, falling to a nearly two-month low. Investors are seeking a safe haven in the U.S. dollar, but gold—the "alternate" currency—has posted even greater gains.
Meanwhile, gold and gold receivables held by euro zone central banks rose by 2 million euros to 334.412 billion euros last week, according to the European Central Bank. The ECB said it was trades in gold coins from one eurozone bank in particular that contributed to the rise.
U.S. and Russia Assess Korean Firefight
While gold prices were farely muted in early trading, the buillion hit session highs, rising $20, as Russia warned that it sees "colossal danger" in an escalation of fighting between the two Koreas. Prices came off those lofty levels—but are still up $15—as the U.S. condemned North Korea's shelling of a South Korean Island, but said it's too early to discuss how our military might deter another attack.
As traders continue to assess the potential impact, MF Global precious metals analyst Tom Pawlicki points out that "looking at history between North and South Korea, this one looks like nothing compared to some of the other provocative acts.
Fighting between the Koreas has seen far more deaths in the past: 115 killed in a bombing in 1987, 46 dead after an explosion earlier this year. Pawlicki says "a couple of artillery shells won't seem like much in a couple days. I wonder how long the safe haven bid in gold will be maintained."
Housing Data Disappoints
Finally, we can look right here at home for economic uncertainty adding to the investment demand for gold. The release of October's existing home sales data, still at record lows, also coincided with the jump in gold to session highs. The housing data implies ongoing weakness in the economy and gold serves as a safe haven from those woes as well.
Traders are also anxiously awaiting the latest FOMC minutes (release schedule for 2pm ET today) to find out how much support there was for QE2 at the last meeting. Also, "if there is a downward revision in GDP forecast, then this could indicate more low inflation, low growth and more QE which is positive for bullion," says HSBC precious metals analyst Jim Steel.
Some bullish factors may remain into the long weekend, but once options expire—as traders say there is a great deal of open interest hinging on this expiration—gold prices could trend lower.
On the heels of long liquidation in the gold futures market last week, demand for gold exchange traded products has been steady for most of the month, but fell slightly on Monday. A sign, perhaps, that the momentum that has spurred this year's gold rush may slow down as investment funds close their books and wrap up trading in the final month of the year.