Commodity Online
These days, gold--the hottest commodity around--is getting almost impossible to call. For the past few weeks, gold's daily price movement has been of $10-$20/oz. So should you be bullish on gold long term? Or will the gold rally run of steam?

According to an analysis by Fortis Metals Monthly, the short-term positions on gold will be  between $730/oz-$820/oz.

The report says October was a very disappointing month for gold bulls, as the price briefly flirted with $900/oz on 8th and 10th October, but then collapsed spectacularly, hitting its lowest in over a year (London afternoon fix) of $712.50/oz on the 12th. It then managed a small rally back up to $730.75/oz by month-end, and $740- 50/oz in early November. Trading however was very volatile.

Why the sudden fall in gold?

While it's often debated whether gold is a commodity or a currency, given that almost every commodity saw its price collapse in October, and in the same month almost all currencies (the yen and the yuan being notable exceptions) saw
their value fall against the US dollar, perhaps for once it is an academic exercise, the report says.

Adding to gold's problems were clear indications that the financial aspect of the current crisis was easing (thanks to major government intervention) : e.g. the TED spread, which shows the difference between US Libor and Treasury bills of the same maturity, peaked on the 10th October at 4.57%, and by 6th November had fallen to 2.08%. As the chart shows, the price of gold in euros followed the TED spread quite closely during October.

This kind of justification for gold's performance of course will not wash for investors who look at it in dollars, and who thought --and perhaps were led to think-- that this was exactly the kind of crisis in which gold would outperform not just some currencies, but all currencies, and not just some assets, but all assets.

Maybe it still will. The rate of physical gold buying has been impressive, and supply remains constrained dehedging continues to fade and central bank sales are very weak. The Central Bank Gold Agreement (CBGA) signatories, who need to sell on average 8.6t/week to hit their 500t/year limit, managed 7.8t and 7.6t in the first two weeks of the new CBGA year (from 27th September) but almost nothing (0.05t and 0.1t) in the following two weeks, and a net purchase of 0.05t in week five.

Perhaps when institutional investors, such as hedge funds, have stopped liquidating their holdings, the price will gain. But it needs to do so soon to be convincing.

What happened with gold last month

Nov 7th: Global gold hedging fell 2.3 Moz in Q3 2008, taking existing hedging down to just 16.5 Moz, according to the Fortis Hedging and Financial Gold Report. However dehedging rates are forecast to slow dramatically.

Nov 5th: Indian gold imports were 27% lower year-on-year in October, according to the Bombay Bullion Association, recording 44t compared with 60t a year earlier.

With inputs from Fortis Metals Monthly