Simit Patel

Gold rallied sharply yesterday, and is rallying again at the time of this writing -- it's now broken above the significant resistance range of 740-750 (which we talked about previously), and is currently testing the $800 level. While the technical outlook on the daily chart still looks a bit bearish for gold, some major fundamental news of late suggests the bull market may be ready to resume. Consider:

• Iran recently switched to gold reserves
• China is massively increasing its gold reserves
• Perth mint, one of the most prominent gold mints in Australia,has suspended orders
• Prominent investment strategist John Embry has warned that December delivery contracts of gold may fail -- this would expose gold scarcity and send prices upwards

The China and Iran situation is particularly interesting; their decision to switch to gold reserves suggests a reluctance to hold US dollars and US Treasuries. This would increase the likelihood that deficit spending would prove to be inflationary, as it would need to be paid for via an expansion of the money supply. Moreover, while it is probably too early to say for sure, this could be the beginning of the world market making a run on the US dollar, a scenario which many dollar bears have come to expect in light of the rising deficit spending and the very weak fundamentals underlying the US economy.

I have viewed gold as a key element of any long-term portfolio, and continue to do so.

Disclosure: I am long gold.

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