Gold prices, which lost 20 percent of their value since early this month, will rise for four reasons, say analysts.
1. Physical demand for gold has not been this strong since January. Edel Tully of UBS said in a note to clients that India stepped up to the plate as gold priced in rupees dropped four percent. Volumes on Friday were well above average and the highest since late August.
Chinese buying was strong throughout the day as well, adding up to amounts we haven't seen in a quite a few months, Tully said. This is also reflected in physical turnover on the Shanghai Gold Exchange, which is the highest since January.
The analyst said there also has been strong physical demand from European retail buyers.
And in a sign that fear levels are rising, the conversion of gold from metal accounts into physically allocated accounts was also evident, highlighting the underlying fear that will ultimately benefit gold once the air clears.
2. Friday's big price drop brought out strategic buyers. Tully also said that once gold fell below $1680 it brought out smart real money-type buyers.
Clearly, directional accounts have an appetite to take advantage of more opportune gold prices that haven't been seen since July, she said.
If these quality buyers multiply, we believe gold would have a base on which to consolidate, although this morning's actions suggests that is still some time away.
3. In the scheme of things, gold is holding up well, despite recent selloffs. Suki Cooper, analyst with Barclays Capital, said gold has been able to minimize its declines even though it had to tackle a stronger dollar against the euro, which has strengthened to levels last seen in January when gold prices lost their lustre amid better macro data.
In addition, the yellow metal had to absorb yet another margin hike from the CME Group on Friday, which buffeted the commodity in Asian trading on Monday.
4. We've been here before. Bayram Dincer, an LGT Capital Management analyst, told Reuters that gold and other real assets are not immune from global sell-offs, and this is a textbook example we are seeing now. If you want to draw an analogy, look at 2008, when the Lehman fall saw gold collapsing around $250. The markets are in this 2008, global post-Lehman sell-off mode.
5. The fundamental things apply. David A. Rosenberg of Gluskin Sheff + Associates Inc. reminded his clients of the big picture. The fundamentals for gold, in terms of being a hedge against the growing lack of integrity in the global monetary system have not changed one iota despite the severe falloff in recent weeks, he said.
Deutsche Bank sounded a similar note to its clients. We view the latest correction in gold as temporary. Gold and silver prices will keep on rising in an environment where concerns towards the global banking system remain, in our view, it said in a note to clients.