Hedge funds setting the stage for a gold price recovery

The U.S. Comex gold futures tumbled 3.44% last week and fell a further 0.33% on Tuesday. Monday was a holiday in the U.S. Upon Wednesday open in Asia, the gold futures rebounded 0.2% after four consecutive days of losses. While the gold futures dropped 3.08%, the Dollar Index rose 1.73% from the end of January to Feb. 15. The Dollar Index retreated 0.14% this week. The S&P 500 index rose 0.73% on Tuesday and has risen 7.34% year-to-date. The Euro Stoxx 50 index surged 1.80% this week on the back of a better-than-expected February German investor confidence index although the stock index rose only 1% year-to-date.

No Harsh Words on Currency Devaluation from the G-20

The G-20 government officials pledged not to use exchange rates for the purpose of competitive devaluation and did not point fingers to Japan. In fact, other countries also wanted to see their currencies weaker. The Euro area economy has gotten worse in the beginning of 2013, prompting the euro/dollar to weaken. The sterling will likely be weaker as the Bank of England suggested that the current real exchange rate is too high for its economic recovery. Many of the core markets are struggling with recessions, implicating that monetary and fiscal policies will continue to be loose, which should support gold prices.

Hedge Funds Reducing Commodities Bets Especially Gold

Speculators reduced their bets on rising commodities prices by 15% in the week ending Feb. 12, the largest weekly reduction since mid-November. In particular, the net long combined gold speculators' positions calculated by Bloomberg tumbled 11% for the week, reaching a six-month low at 128,581 contracts. Better retail sales and consumer confidence in the U.S. have led to poorer gold sentiments because of traders' concerns of an earlier termination of the "QE infinity" in 2013. The market will scrutinize the minutes of the January FOMC meeting to be released on Feb. 20 for the timing and conditions for halting the QE programs. However, the cleaner positioning can prepare the stage for a gold price rebound. The gold-backed ETP holdings were 2,602.3 tons last week, about 1.1% below the peak reached on Dec. 20.

Surge in Gold Traded in China

As expected, the volume traded in the Shanghai Gold Exchange reached a record level on Monday after the traders came back from the week-long Lunar New Year holiday, taking advantage of the 3.37% drop in the gold price last week.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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