Gold to rally yearend as traders close some of record short positions

Today’s AM fix was USD 1,237.25, EUR 898.71 and GBP 759.42 per ounce. Yesterday’s AM fix was USD 1,229.50, EUR 892.62 and GBP 754.57 per ounce.

Gold rose $3.10 or 0.25% yesterday, closing at $1,240.70/oz. Silver climbed $0.26 or 1.32% closing at $19.96/oz. Platinum fell $3.24, or 0.2%, to $1,358.25/oz and palladium rose $0.25 or 0%, to $715.90/oz.


Gold in U.S. Dollars, 30 Days - (Bloomberg)

Gold is marginally lower today after two days of gains as the Fed's two day policy meeting begins. More positive than expected U.S. data and continuing SPDR outflows may have led to weakness.

Gold's gains in recent days are likely partly due to a short covering rally. Nervous traders may be closing some of their record short positions ahead of a Federal Reserve policy decision on whether to begin tapering its equity and bond friendly debt monetisation measures.

Most economists believe the Fed will not begin tapering till March of next year, which could prompt traders to further cover their short positions.

Short positions are at multi year highs and if the Fed does not taper tomorrow we will likely see a large short covering rally going into the New Year as shorts close out positions and balance books at year end.

Bearish bets by hedge funds and money managers in U.S. gold futures and options are close to a 7-1/2 year high, according to data from the Commodity Futures Trading Commission (CFTC). SPDR Gold Trust, the world's largest gold ETF, said its holdings fell 8.70 tonnes to 818.90 tonnes on Monday - its biggest outflow since Oct 21. Holdings are at their lowest since January 2009 after more than 450 tonnes of outflows this year caused by traders and more speculative investors channelling money toward riskier assets such as equities and bonds, which are at record highs in many countries.

Importantly, and little reported on, is the fact that the ETF flows have been matched and greatly surpassed by physical gold in China and imports from Hong Kong into China alone.   

Gold has lost 25% of its value this year after 12 years of gains. There are credible allegations that the market was subject to price manipulation with banks manipulating prices lower through massive concentrated selling at times of low liquidity. Allegations that Chinese entities may be manipulating paper gold prices lower in order to buy physical gold on the cheap are gaining credence.

Whatever, the reasons for gold's price fall it is a healthy development as it has led to the speculative hot money and weak hands being washed out of the market. Gold is on a much more sustainable footing now and is very much in strong hands now, which bodes well for gold in 2014 and 2015.

About the Author

Mark O'Byrne is executive director of Ireland-based GoldCore.