Gold investors warned to liquidate after 'buying frenzy'

Demand for physical gold ? as opposed to paper contracts ? has been flagging Photo: BLOOMBERG NEWS

John Reade, an analyst at UBS, said the number of "net long" positions held by speculators reached 29.02m an ounce last week, a record high.

Investors watch Comex contracts as an indicator of froth in the market. Last week saw a jump of 6.4m ounces in net long contracts, a rare occurrence. When such sudden moves have occurred in the past, gold has fallen 5pc over the subsequent month on average.

The buying frenzy last week followed Chinese comments on the need for reserve diversification from dollars into euros, yen, and gold, as well as a proposal by the United Nations for a world currency. The dollar fell sharply, propelling gold to $1011 an ounce – tantalizingly close to its all-time high of $1030.

Mr Reade, a repeat winner of the London Bullion Market Association's forecasting prize, said speculation in silver futures is even more extreme by some measures.

Demand for physical gold – as opposed to paper contracts – has been flagging, with Indian jewellery demand well down on the levels a year ago and poor volumes reported in Turkey and Switzerland. The metal is trading at a discount on Istanbul's exchange.

"We recommend that nimble investors take profits on any long gold and silver positions, looking to re-enter after a correction," said Mr Reade. His price target is $950 over the next month, with fresh rallies in 2010.

The last time net long contracts on Comex reached levels close to last week's high was in February 2008 as gold screamed to its historic peak. Prices crashed by $150 an ounce shortly afterwards.

However, chartists say the technical signals are entirely different this time. Gold appears to be breaking through a "triple top",
which could push prices much higher.