What next after the massive gold short-covering?

The U.S. Comex gold futures (COMEX:GCU13) rose 0.15% last week after declining 0.85% the week earlier. The futures popped 1.68% on Monday but fell 1.03% on Tuesday to end at $1,320.60. After falling 0.95% last week, the Dollar Index rebounded 0.79% to 81.768 on Tuesday. The S&P 500 Index and the Euro Stoxx 50 Index rose slightly by 0.16% and 0.57% respectively this week. The U.S. 10-year government bond yield jumped 14 bp in the past two days, reaching 2.719% on Tuesday. The yield was as high as 2.739% on July 5 as the market has been pricing in the Fed's QE tapering.

Better Data from China and the U.S., and More Curbs in India

The gold futures reached $1,343.60 on Aug. 12, the highest level in about three weeks. The China July industrial production climbed 9.7% year-on-year, much higher than the 8.9% expected. China's July trade data were also better than expected, indicating the economy is stabilizing. The gold market also likes the news that gold purchases by China have jumped 54% in the first half of the year while the ETF GLD received the first inflow in two months on Aug. 9. On the other hand, India raised the gold tariffs the third time this year in order to reduce the current account deficit by slamming down gold imports to 850 metric tons this year from 860 metric tons last year. Higher taxes and a lower rupee will make local gold prices more expensive and dampen demand. As the festival demand will start soon, the limited imports will likely lead to an increased in gold smuggling. Gold prices fell on Tuesday as the U.S. July retail sales increased four months in a row, leading to a jump in the U.S. Dollar as well as the 10-year government bond yield, confirming that the U.S. economy continues to recover.

Massive Short-covering of Gold

The speculators net combined shorts positions in gold declined by a staggering 23,518 contracts in the week ending Aug. 6. The net non-commercial gold position also increased by the most number of contracts since August 2012 before the QE3 announcement. However, Barclays warned that for the gold prices not to fall further, physical demand would need to reassert itself in light of the continuation of gold-backed ETP outflows and the short covering, which already has occurred.

About the Author
Austin Kiddle

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

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