Beware of the gold short-covering

After a brief short-covering rally of 2.16% on Wednesday, the U.S. Comex gold futures (COMEX:GCG14) dropped 1.23% on Thursday to $1,231.90 and fell a further 0.5% during Asia's Friday morning. On Thursday, the Dollar Index (NYBOT:DXZ13) suffered a 0.74% peak-to-trough loss, preventing the gold futures from dropping further. The S&P 500 index dropped 0.56% while the Euro Stoxx 50 index plunged 2.01% in the past two days. This week, the CRB Commodities Index has risen one percent while the 10-year U.S. government bond yield has jumped almost 13bp to 2.8717% on Thursday on the prospect of better U.S. economic growth.

Big Data Week for the U.S. and the ECB Hold

Two regional Fed presidents who are non-voters until 2015 have recently said that they either want to announce a total size of the remaining bond purchases or see a definitive timetable for winding down the QE program. The U.S. Q3 GDP was revised to an annualized 3.6% from the earlier estimate of 2.8%, although half of the gain in growth was because of inventory growth. The latest weekly jobless claims fell 23,000 to 298,000 compared to an expected 320,000 while the November ADP report showed that the private employment jumped 215,000. The Q4 growth in the U.S. will perhaps not slow down as much. Traders will focus on the November non-farm payroll and the unemployment rate on Friday to see if the Fed will start tapering this month. In Europe, the ECB president did not change the interest rates despite forecasting an inflation of below 2% for both 2014 and 2015. The EUR/USD (FOREX:EUR/USD) rallied and Germany's 10-year government bond yield jumped as a result.

Gold Shorts have been Building Up

While the gold-backed ETP holdings have dropped 10 metric tons this week and 800 metric tons to 1,831 metric tons on Dec. 4, the number of short gold contracts by managed money is also approaching the high reached on July 9. The gold price subsequently rallied 20% from the trough at the end of June. There is no guarantee that gold will not fall further, but beware of the short-covering rally.

What to Watch

We will monitor China's November exports and imports data and Japan's Q3 GDP on Dec. 8, the St. Louis Fed President's (voter) speech and China's November CPI on Dec. 9, China's November industrial production and retail sales on Dec. 10 as well as the ECB monthly bulletin and the November U.S. retail sales on Dec. 12.

About the Author
Austin Kiddle

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

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