A few reasons to cover the gold shorts

The U.S. Comex gold futures (COMEX:GCU13) surged 3.33% on Monday, the highest percentage change since June 29, 2012. On Wednesday morning in Asia, the gold futures rose further and traded above $1,340. The Dollar Index fell about 0.8% this week to 81.945 on Tuesday. The S&P 500 index was flat in the past two days while the Euro Stoxx 50 Index rose 0.25%.

A Floor to China's Growth

The gold market has been adjusting to the expectations of the Fed's tapering. A Bloomberg poll shows that 50% of those surveyed expects that the U.S. Fed will reduce its bond purchases to $65 billion a month in September. The market also takes comfort from the news that the Chinese government will put a floor of its GDP growth at 7% because China needs to become a moderately wealthy society by 2020. The July flash China PMI came in weaker at 47.7 compared to an expected 48.2. China has also started to liberalize its interest rates by removing the lower limit of the financial institutions' lending rates. The next important step in China's structural reforms will be the liberalization of the deposit rates.

Support for Gold Prices

The surge in gold has been accompanied by a weaker U.S. dollar. In June, the existing home sales in the U.S. fell to 5.08 million on an annualized basis compared to the median forecast of 5.26 million and 5.14 million in May. On July 22, the gold futures closed above its 50-day moving average for the first time in eight months. Physical demand has been robust in Asia as evidenced by the persistent premiums. The dwindling Comex gold inventory has raised concerns of default by the Comex. Gold traders are increasingly covering their shorts as physical gold delivery is getting a little harder each day. The CFTC data shows that during the week of July 16, the net short positions in gold by speculators fell 10.82% to 121,305 contracts while the net combined positions surged a whopping 47.72%. On the negative front, India has further restricted gold imports by requiring the importers to set aside 20% at the customs warehouses for re-exports. The gold will be made available to jewelers and bullion dealers only. The All India Gems and Jewellery Trade Federation expects the gold imports to drop 63% in the second half of this year, further pressuring gold prices.

About the Author
Austin Kiddle

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

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