Bullion rose as much as three per cent Wednesday and is up seven per cent this week.
It’s up 20 per cent since June, having broken cleanly above technical resistance from a near three-year trend-channel and putting its ratio to the S&P-500 stock index at the highest since 1988.
But that ratio remains far below its peaks of 1980 and the 1930s, and gold is still below its inflation-adjusted high of nearly $2,500.
“We don’t see anything out there that’s going to reverse the appetite for gold,” said Deutsche Bank commodity strategist Michael Lewis, whose team reaffirmed on Wednesday its forecast for $2,000 an ounce next year, among the most bullish in the market based on a Reuters poll in July.
“Given gold is a financial asset, it’s interesting that it doesn’t look that expensive at these sort of levels.”
Gold’s rise came as a dive in French bank stocks sent new shudders through anxious financial markets and U.S. stocks skidded.
After a one-day respite thanks to the Fed comments to keep interest rates near zero for at least two more years, the rout resumed on Wednesday with the S&P falling more than three per cent.
Friday’s U.S. credit rating downgrade accelerated a slump in risk assets amid an increasingly grim-looking U.S. economic outlook and expanding worries over eurozone debt.
In Europe, concern this time was with France, joining a long list of woes as shares in its banks — among the most exposed to Italian and other peripheral eurozone government debt — slumped as much as 20 per cent in afternoon trade as fears about the currency bloc’s debt crisis moved back to the forefront. President Nicolas Sarkozy called for new fiscal restraint as markets fretted over the possibility that France may be next for a debt downgrade.
With governments and central banks running out of tools to combat the financial and economic distress, few analysts were looking for the rally to end anytime soon.
“The skies would appear to be clear for these safe havens like gold,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group, Greenwich, Connecticut. With the debt woes spilling over into the world’s biggest economics, “we don’t know where this thing is going to stop anymore.”
The Fed’s promise on interest rates near zero supported the view that the opportunity cost of holding non-yielding gold would remain depressed. But it also triggered a fleeting rally in stocks on Tuesday that spurred a round of profit-taking in gold.
Global holdings of gold-backed exchange-traded funds, calculated by Reuters, fell 7.2 tonnes on Tuesday in their first daily decline in 13 sessions.
Gold’s rally has broken it clear of the ascending trend channel that contained prices since late 2008 — the last time it staged an eight-per-cent gain over four days.
But the Relative Strength Index was flashing overbought status at 84, far above the 70-per-cent mark that often signals a correction may be in store. Gold has pulled back both times the index topped that level in the past 12 months.
“When you have a metal that has three or four distinct reasons why it has headed higher, it is very difficult not to be bullish in that environment,” said Mitsui Precious Metals analyst David Jolliet. But he added: “Given how far and how quickly we’ve run up, the move seems somewhat overextended.”
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