Best Week In 11 For Gold On US Short-Covering And Indian Festivals

The PRICE of wholesale gold slipped but held near 1-month highs Friday morning in London, heading for the strongest week-on-week gain since mid-August at $1343 per ounce.

Rising 1.7% from last Friday's finish, gold prices lagged silver – up 2.3% for the week – as European stock markets held flat and Asian stock markets fell hard.

Japan's Nikkei share index closed Friday more than 4% down for the week, as money-market rates in neighboring China held at multi-month highs.

Beijing today announced a new benchmark lending rate, aimed at letting market forces set key levels more transparently.

Shanghai gold prices meantime slipped on Friday, cutting the premium over and above international benchmarks to $2 per ounce.

In US Dollar terms, "Gold prices have now breached key resistance at the 50-day moving average," says a note from brokers INTL FCStone.

"We have also noticed that open interest [in the gold futures market] is rising in line with higher prices, indicative of fresh longs [ie, bullish traders] entering the market."

Catching up after the US government shutdown, futures regulator the CFTC will release commitment of traders data from 3 weeks ago today. More recent figures will follow next week, it said.

"Clearly," says global bank and bullion market-maker HSBC in a note, "gold prices [on Thursday] received a boost from a combination of weak US data, a slump in the Dollar and positive Chinese economic data.

"The confluence of the three events is gold-bullish and helped trigger a wave of short covering," it says, with traders betting that gold prices would fall forced to close their positions at a loss.

"Much of this recent strength we've seen in gold prices," agrees Mark Keenan of French investment bank SocGen's Cross Commodity Research team "has been a result of short-covering in the futures markets."

That said, November also marks the "peak gold-buying period" in India, Keenan reminded CNBC this morning, with the festival season culminating with Diwali a week-on-Sunday.

Gold prices in India today hit new record highs above the world's London benchmark, with premiums to international prices reaching $130 per ounce according to Reuters, up from $100 a week ago.

"The supply issues in India are even more acute right now," says a note from Swiss investment bank and London market-maker UBS, "given the fast-approaching festive season of Diwali."

The reality, says UBS, is that the Indian government's anti-gold import rules mean "the supply chain is currently too slow to keep up" with Diwali demand.

Illegal inflows "may help" the note goes on, but "Internal gold supply satisfies only a small portion of demand, and the sense is that scrap sales [for recycling into new product] have actually stalled."

This week saw several new reports of large black-market gold seizures, while the government this week repeated its commitment to restricting Indian gold coin and bullion imports regardless.

Adrian Ash

(c) BullionVault 2013

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