Why Some Gold Bugs Are Still Hanging On


Gold may have suffered its biggest one-day decline ever this week as investors fall rapidly out of favor with the safe-haven asset, but that hasn't stopped some gold bulls from standing firm.

According to Clifford Bennett, chief economist at financial services firm The White Crane Group, the perception of gold among investors has changed but the forces driving the precious metal have not.

He says that once traders with short positions in gold start to unwind their bets, the price of gold should rally as quickly as it fell over recent trading sessions.

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"I sincerely believe that the moment the now significant short position holders begin to take profit, that this market will rally at least 50 percent of the fall just seen, just as rapidly," Bennett said in a note.

Disappointing U.S. and Chinese economic news in recent days and fears that Cyprus, and possibly other central banks, could dump their gold reserves have fueled negative sentiment towards the precious metal.

Gold prices have plunged about 16 percent over the past week to hit a two-year low of $1,321 per ounce on Tuesday, later rebounding to $1,367. The market suffered its sharpest ever one-day slide on Monday.

In a bid to stabilize volatility in gold markets, the Chicago Mercantile Exchange Group said it has raised collateral requirements for trading in benchmark gold, silver and other precious metals futures contracts, effective at the close of business on Tuesday.

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And analysts say that if gold falls below important technical levels that it could have further to fall.

"If you look at technical levels, there is further support at $1,300, but if that were to be breached then you could be looking at falls to $1,250," said Peter Harper, director of distribution at Betashares Capital.

(Read More: Here's Why Gold Is Getting Crushed)

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Long-Term Bullish

Still, The White Crane Group's Bennett said his long-term bullish view for gold remained intact and his views on the positive drivers for the safe-haven asset class, such as central banks printing money, have not changed.

"Nothing has changed except perceptions, and with gold that matters a lot. Yet the perception that the market is oversold will also develop in coming days," he said.

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As a further reason to expect a rebound in the gold price, Bennett said the recent falls in the price of gold will likely have piqued the interest of Chinese and Indian central banks, large buyers of the yellow metal with the ability to move the market.

"The central banks of China and India must be salivating, but will hold their cards close to their chest to see just how far the market can fall before they make an aggressive purchase," he said.

Other analysts agreed that now was the time to buy rather than sell the yellow metal.

"All the signs I'm seeing make me more bullish on gold not less bullish. Maybe India has been buying less but that's picked up over the past few days and numbers out of China haven't been that bad," said David Baker, managing partner at Baker Steel Capital Partners.

"Our thesis is that currencies are being debased by money printing. I don't see any reason why not to buy gold especially as it's now 30 percent of its peak, I think it looks quite interesting," he added.

(Read More: Central Banks Bought Most Gold in Nearly 50 Years)

In February, a report from the World Gold Council showed central banks had bought more gold in 2012 than they have in nearly half a century as they sought to diversify reserves.

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