Shorts "Wrongfooted" On Gold By US Default Swerve, But New Longs "Lacking"

WHOLESALE prices for physical gold held near $1320 per ounce this morning in London, gaining 3.5% from last Friday after the mid-week US debt-limit deal saw what one dealer called "heavy short covering and some fresh buying."

US Treasury yields fell sharply as prices recovered further on Friday. World stock markets rose to 5-year highs.

Silver bullion traded in London meantime fell back from another attempt at $22 per ounce, trading 2.5% up for the week.

"The whole [debt limit] mess is just being postponed by 3-4 months," says Commerzbank analyst Carsten Fritsch.

"[This] makes a reduction of Fed asset purchases rather unlikely for the time being," encouraging fresh gold investment as the US central bank continues its quantitative easing of $85 billion per month. 

Thursday's jump in gold was "one of [its] most convincing moves to the upside of recent weeks" says Edward Meir at INTL FC Stone.

"[But] the precious metal still needs to do more work before some of the technical damage is repaired."

So-called "gold shorts" who were positioned to profit if gold fell had to close their bets fast as the metal jumped this week, says Societe Generale analyst Robin Bhar

"We [had also] worked on the basis that gold price action was bearish, and that if we didn't have a debt default, gold would fall.

"There were probably lots of shorts in the market...All of those guys have been wrongfooted, and have had to cover."

On the other side of the trade, however, "Gold is failing to attract new longs [ie, bullish positions] in the futures market," says Walter de Wet at Standard Bank, "which is an ongoing concern.

"Furthermore, the risk of more Exchange Traded Fund liquidation must have increased now that uncertainty around a US default has eased."

The giant SPDR Gold Trust – the world's largest gold ETF, listed in New York (ticker: GLD) – yesterday shed metal from the gold backing its shares for the 11th time in 20 sessions, taking its total allocation to 882 tonnes, the lowest level since February 2009.

The GLD last added metal one month ago. It has since shed 30 tonnes as shareholders liquidated positions.

Meantime in India, where gold today held $100 above London benchmark on a continued shortage of metal, new data showed exports of gold jewellery rising 16.5% by value to $654 million in September.

Thanks to a collapse in gold imports, however – caused by the government's anti-gold rules and duty hikes – the industry has seen jewelry exports fall 60% over the last half-year compared with April-Sept. in 2012.

The Economic Times of India said today that HSBC is closing its retail investor stock brokerage in the country, at the cost of 300 jobs. The bank cited a shift by private investors to equity derivatives trading, as well as a preference for gold investing and real estate over stocks.

"With inflation still elevated in many markets and interest rates not offering adequate compensation," says a separate report from HSBC economists, "[we] expect Asia’s voracious appetite for gold to persist.

"Asia is going for gold. Over recent years, demand has soared."

Adrian Ash

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.