FOCUS: Chinese Demand, SPDR Inflow, Buy Stops, Short Covering Boost Gold

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Monday August 12, 2013 11:30 AM

(Kitco News) - Chinese demand, chart-based buying and short covering are all being cited as factors that helped gold surge to a nearly three-week high Monday despite a mostly stronger tone in the U.S. dollar.

Some observers also cited softer-than-forecast Japanese economic data. Also, an inflow into the world's largest gold exchange-traded fund on Friday was listed as an influence helping sentiment, since previously ETF withdrawals had exacerbated the weakness in gold since the start of the year.

Technically, gold may gain further upward momentum if it can break and close above $1,350 an ounce, analysts and traders said.

"There was very good physical demand overnight out of Asia," said Bill O'Neill, one of the principals with LOGIC Advisers. "That got things going, and it kind of built upon itself….We hit (buy) stops as the session wore on."

As of 10:45 a.m. EDT, gold for December delivery was $27.40, or 2.1%, higher to $1,339.60 per ounce on the Comex division of the New York Mercantile Exchange. The contract peaked at $1,343.70, its strongest level since July 24. September silver was up 92.3 cents, or 4.5%, to $21.33 an ounce and hit a high of $21.36 that was its loftiest level since June 19.

"I think it's technical," said Phil Flynn, senior market strategist with Price Futures Group. Several analysts said pre-set buy stops were triggered as the market moved through key chart points.

But other factors were at play as well, including a fresh news report about the robust demand from China so far this year. The China Gold Association said that the country's gold consumption in the first half of 2013 rose 54% year-on-year to 706.36 metric tons.

"You still have China on a gold- and silver-buying binge," Flynn said. "At a time when prices were falling, China continues to buy. That report today is a reminder that there is still a lot of physical demand for the metal.

"We know, of course, in India they have tried to slow down demand with import duties and other issues. But I think even in India, you're getting a black market going for the metal."

Kevin Grady, president of Phoenix Futures and Options on the Comex floor, said gold futures are in slight backwardation, in which prices for the nearby contract are more expensive than for deferred contracts and seen as a sign of a tightening market. Normally, deferred contracts are more expensive due to costs such as storage. As of Friday's close, August gold had a 70-cent premium to December.

"There is definitely buying in the physical market," Grady said. "It's coming out of Southeast Asia and it's coming out of the Middle East, and it's strong. There's been buying the entire way down."

Flynn and O'Neill also pointed to an increase in holdings of SPDR Gold Shares on Friday as a factor that may be helping sentiment for the metal. The Web site of the world's largest gold ETF showed that holdings rose by 1.8 metric tons to 911.13 tons, the first increase since June 10. For the year, however, holdings are down by 450.69 tons.

"We saw people actually getting to get back into gold (via SPDR), so that was a good thing," Flynn said. "It is showing perhaps the ( ETF ) investment demand that has been non-existent in gold could be coming back."

Flynn also said softer-than-expected economic data in Japan may be lending gold support since country "is probably going to go full speed ahead with more stimulus."

Japan's gross domestic product grew at an annualized rate of 2.6% in the second quarter, roughly a percentage point below most consensus forecasts. Financial-market participants are now wondering whether the country will go ahead with a planned hike in sales taxes.

"It (the data) would increase the odds that we're going to have more stimulus in Japan. And that, of course, is bullish for the metals," Flynn said.

The rise in gold is occurring against a backdrop in which a number of mining companies, reporting losses in the second quarter largely due to a fall in the price of gold, have been announcing cutbacks in operating expenses and capital expenditures for new projects, Flynn pointed out.

Technicals, Short Covering Play Key Role In Rally

Grady and O'Neill said traders who had short, or bearish positions, were buying to cover or exit those trades.

Part of this may be due to doubts among some about whether the Federal Open Market Committee will start tapering its quantitative easing in September, as many expect, Grady added. If the Fed does not taper, this will add to inflationary worries, he said.

Meanwhile, Grady said, buy stops were triggered in December gold. "Above the $1,330 level and $1,335, you saw some big sweeps," he said.

December gold moved more convincingly above the 20- and 50-day moving averages that it flirted with the last two days. The 20-day average now passes through $1,310.80, while the 50-day is at $1,313.30.

Traders will be watching to see if gold can pop above $1,350, a level not touched by the December futures since June 20. The market stalled just shy of here on July 23 when it peaked at $1,349.20.

"If we were to break through $1,350, it would be significant and you would probably see additional stops hit," O'Neill said. "That's an important resistance level. If we break through there, the rally could be extended further."

However, Grady pointed out, there is also potential for some hedging by gold producers on an uptick.

Silver, meanwhile, is rising after having traded in a sideways pattern for more than a month, Flynn said. Since late June until the end of last week, the September futures had meandered in a range between the June 28 low of $18.17 to the July 23 high of $20.595, before hitting a nearly eight-week high on Monday.

Several observers said that gold on Monday is breaking its usual inverse correlation to the U.S. dollar. The metal was up even though the September dollar index was up 0.255 point to 81.425.

"Gold and silver are extending the run even with the dollar being stronger," Flynn said.

Read the latest news in gold and precious metals markets at Kitco News.

By Allen Sykora of Kitco News asykora@kitco.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Commodities

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