Gold Needs Good News to Break Through $960 Barrier

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"With central banks now less inclined to sell their gold. . .this changing attitude will have a positive impact on gold."

With regard to the International Monetary Fund (IMF) and the European Central Bank's (ECB) gold sale plans, it appears that the agreement limiting gold sales, the Central Bank Gold Agreement (CBGA), will begin towards the end of September. The only difference between the new agreement (CBGA III) and the current CBGA II is that the sales limit will be reduced from 500 tons a year to 400 tons a year. This lower sales figure suggests that there are fewer "eager" sellers in the market. Sales of gold from 27th September 2008 to end July 2009 have been just over 140 tons, far short of the 500t limit. With central banks now less inclined to sell their gold reserves than they once were, this changing attitude will have a positive impact on gold.

Some central banks in Asia are adding gold to increase their reserves as they continue to remain skeptical on the value of the USD. And, there has been a major shift towards gold in China. For the past 50 years, the Chinese government has controlled the distribution of all types of gold, and forbade citizens from owning or trading any type of precious metal. Now they are allowed to buy gold bars and sliver bars. These new buyers of gold will ultimately have a positive effect on gold.

While I expect the short-term trend to remain choppy, I remain very bullish on the mid- and long-term trends. It is difficult to predict short-term trends at the moment as some unexpected news could have an impact on gold prices.

From November 2008, gold began a new upward channel. While the support level of this trend has been breached, I believe the fundamentals remain far too strong and it is unlikely that the price will drop much. We may see further sideways action, but I expect the price to remain above the support level of $920. Once gold breaks through $965, we could see a quick move to test the $1000 level.

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