Gold got hit by a double whammy last week – not only did the news come out that Funds controlled by George Soros and Louis Moore Bacon had reduced or offloaded completely some or all of their SPDR Trust and Sprott gold holdings in Q4 2012, but also some Fed governors gave the impression that perhaps the Fed’s QE programme might be nearing its end and monetary tightening – or rather less loosening – might soon be on the cards. 

As we have pointed out before, some banks would undoubtedly come out with new assessments paring their gold price predictions – and sure enough Goldman Sachs analysts made what may prove to be an extremely ill-timed prediction that gold would slip further and accelerate downwards, sharply lowering their average gold price call for 2012 3-, 6- and 12-month gold price forecast by over $200 to $1,615/oz, $1,600toz and $1,550/oz from $1,825/oz, $1,805/oz and $1,800/oz.

But Italy and Ben Bernanke, for a change, have come to gold’s rescue and yesterday saw the yellow metal recover much of last week’s fall.  The Italian elections have thrown the whole Eurozone into disarray with no political party gaining anything like parliamentary control – indeed the biggest gainers were those who want Italy to leave the Eurozone – and it is going to be difficult for any parties to form a coalition capable of lasting perhaps more than a few weeks or months. 

And to cap it all, maverick former prime Minister, Silvio Berlusconi’s party won control of the Italian Senate – not a recipe for ongoing political stability in the Eurozone’s third largest economy.  Indeed as German bank Commerzbank stated in its latest daily comment “the outcome of the Italian elections is likely to spark increased demand for gold, as it could force the sovereign debt crisis back into the foreground.”

But to add to this Fed Chairman Bernanke’s semi-annual report to the U.S. Congress, as prescient gold commentator Jeff Nichols puts it “took the wind out of the Fed hawks who favor an early reversal of Fed policy . . . and, in so doing, may have fueled a lasting gold-price reversal and triggered a renewed upswing in the yellow metal’s price.”  

Given that one of the key elements in driving the price down last week was the media interpretation that the comments by some Fed Governors meant that QE might end sooner rather than later, Bernanke’s statement came as a cold shower for those who had followed that particular lead.

Jeff Nichols again yesterday advised his followers: “If today’s gold-price advance sticks — and I think it will — the technical charts will suddenly look much more inviting . . . enough so that institutional traders and speculators may begin shifting back to the long side of the market — fueling a much more high-powered gold-price advance.”

Now gold is a fickle and often unpredictable animal, at least in the short term, but it does look like this seemingly, pretty-decisive break upwards through the $1600 level, could indeed have legs – for all the reasons put forward in my previous article commenting on the fall back downwards through $1600 (Talk of gold upturn premature as bears taste blood?.)  The latest moves will have confounded the bears for now – but a wounded bear is a dangerous beast and there may be more attempts to drive the price down.  

But it does look as though the recent price activity may have driven many of the weak holders out of gold and those who have been purchasing will be strong holders – for example we hear that Russia and Kazakhstan again increased their gold reserves last month – and now that the Chinese are back from their New Year holiday period we could see a demand boost there too as recognisance is gained of the slightly lower prices currently prevailing which may just be seen as a bargain in the gold hungry Eastern markets..

What the past few days has brought home is how fragile any putative recovery really is.  We did note in our article mentioned above “In theory, gold should still be acting as the ultimate safe haven, but the weak holders are getting out in the face of siren songs from the brokers telling them that the recession is over and that they should invest in general markets despite the inherent weaknesses underlying the economy.  Any recovery, if there really is one under way, is fragile indeed and now would seem to be a bad time to relinquish precious metals.”  Thus it is encouraging for our view that Commerzbank seems to agree and noted that over the past few days, gold has been living up to its reputation as a safe haven again.

Again – as we noted in our prior article, now does not seem to be a good time to sell your gold.  There’s enough predictable political and economic bad news ahead to keep gold bounding back from any manipulated fall – and unpredictable news (Donald Rumsfeld’s ‘unknown unknowns’) if it occurs could tip the balance in gold’s favour yet again and even yet drive it towards the seemingly unattainable $2000 level this year.  With gold you never know when it may take off again – the latest move may be yet another false dawn, but in our view the odds are that the gold price is more likely to continue to rise overall than to collapse.