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It Did Not Take Much to Get the Gold to Rally

The U.S. Comex gold futures surged 1.82 percent to $1,615.50 on Tuesday and saw the biggest one-day percentage gain since 6 November, 2012. The gold futures fell 3.60 percent this year. While the gold price rebounded, the Dollar Index has continued to climb, rising 0.48 percent this week to 81.87. The Dollar Index has risen for three consecutive weeks, largely driven by the weaker Euro/Dollar and the British Pound. The Euro/Dollar touched a recent low of 1.3018 on 26 February. The S&P 500 index dropped 1.23 percent while the Euro Stoxx 50 index fell 2.26 percent this week.

Declining Speculators and Investors Demand for Gold
According to the CFTC, gold speculators have cut their combined futures and options net-long positions by 40 percent to 42,318 contracts in the week ending 19 February, approaching the low reached in September 2008. Gold-backed ETP holdings also fell to a five-month low on 25 February to 2,536.289 metric tons while large investors such as George Soros and Louis Bacon cut their gold holdings in the last quarter.

Italian Election Jitters, Chinese Gold Demand and the Fed Speech
As traders have already cut their long positions or added to their short positions, it did not take much for the gold price to rally back from a recent low level of $1,554.30. First, the success of Berlusconi in the Italian election last weekend and the popularity of Grillo suggested that the citizens are turning their backs on austerity measures. Gold prices rebounded on the European debt uncertainties. Gold sentiment also got a boost as the trading volume in the Shanghai Gold Exchange was more than twice the 2012 average on 18 February. The gold price surged on Tuesday when the U.S. Fed chairman Bernanke suggested in a Senate hearing that his $85 billion bond purchases supported economic recovery and job creation, with benefits outweighing the costs from excessive risk-taking in some sectors. Bernanke also said that the equity risk premium is still wide while his inflation record has been the best of any of the Fed Chairman.

While the gold investors continue to monitor the sequestration talks in the U.S., the strengthening U.S. dollar seems to suggest that the economy is strong enough to handle the automatic spending cuts of about $1.2 trillion over the next nine years.

Kelly Smith
Sharps Pixley, London

27 Feb 2013 | Categories: Gold

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