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Unrest in Egypt Fueling Rally in Gold

A combo of pictures shows Egyptian demonstrators tearing a huge portrait of President Hosni Mubarak during a protest against his rule in the northern port city of Alexandria on January 27, 2011.
AFP | Getty Images
A combo of pictures shows Egyptian demonstrators tearing a huge portrait of President Hosni Mubarak during a protest against his rule in the northern port city of Alexandria on January 27, 2011.

Unrest in Egypt putting the fear factor back into the gold trade—at least for today.

Ashraf Laidi, chief market strategist at CMC Markets, says Friday’s gold rally is “safe haven buying” and can also be seen in U.S. Treasurys and oil.

“Intensifying violence in Egypt” has “implications for Mideast policy and oil flow,” he says.

Volume in the April gold futures contract was about 35 to 40 percent above normal today, trading well over 200-thousand contracts.

According to traders, short-covering by speculators is fueling more buying by computer-driven models that track order flow and momentum.

“The market is definitely short in gold—you are definitely running some of the shorts out of the market today,” says Kevin Grady, gold trader with MF Global. And that short-covering demand is fueling more buying by algorithmic systems that are programmed to look for volatility in the markets.

“There is so much panic, the moves are not $5 or $10 moves but $30 or $40 moves,” says Kevin.

Longer-term, the word is that big money is moving out of some of the hot commodity trades of 2010 and into other asset classes.

The headline from a weekly report on global markets from BofA Merrill Lynch is calling it the “Great Rotation,” and says, “Global commodities recorded its biggest weekly outflow (-$1.5 billion) on record, mostly driven by redemptions of $1.2bn (1.7 percent of AUM) from gold funds.”

But not everyone agrees with that trade. Rohit Savant, CPM Group senior commodity analyst, says that recent declines in the price of gold are more short-term and that investors shouldn’t rotate out of gold.

Expecting gold to make new highs this year, Savant says there are “...still a lot of problems both politically and economically that need to be resolved and as long as those problems exist, that will continue to support the price of gold.”