Gold Price Fluctuation

More fun from the gold sector today. Just as various hedge funds have amassed a huge bet against gold (the second-largest, actually), prices for the precious metal have rallied by the most in 15 months as demand for coins and jewelry skyrockets.

Bloomberg reports that as of April 23, funds and other major speculators had 69,276 short contracts. Net long position was down 25 percent at 46,168 futures and options.

However, gold has gained 11 percent after hitting a two-year low point on April 16. In fact, just last week, after the drop, the U.S. Mint sold out of even its smallest gold coin. Sales figures are likely to be at their highest since December of 2009.

The market got so heated that Indian jewelers were paying premiums of up to five times the usual.

Bloomberg reports:

“It’s bizarre that the price has come back so rapidly,” said Donald Selkin, who helps manage about $3 billion of assets as the chief market strategist at National Securities Corp. in New York. “After the big decline, demand jumped like crazy. It’s the old rubber-band theory: You stretch too far, and eventually, it snaps back. Banks came in to buy, and there is record demand for coins around the world.”

Last week, gold futures were up 4.2 percent at $1,453.60/oz, and a number of analysts expect the trend to continue at least in the short term.

Meanwhile, mints from Turkey to Australia are seeing exploding demand for gold coins, while jewelers from India, China, and Thailand are buying up gold in massive quantities, Bloomberg reports. And central banks, of course, continue to expand their gold holdings; the World Gold Council indicates that these banks could add around 550 tons this year alone.

Asia Drives Gold Resurgence

So just why are gold prices up by as much as 6.8 percent from their dismal lows, and what does this portend for the markets at large?

The consensus seems to be that the latest uptick in gold prices is an outlier. Massive demand for physical gold and jewelry supplies from Asia has bumped up demand, which in turn bumped up prices. However, the major financial investors continue to edge away from gold in favor of other metals or commodities.

ETFs, for example, showed continued decline, meaning investors keep selling their gold shares. India and China accounted for the major part of this recent resurgence in gold. In those countries, of course, gold is not only seen as a traditional store of wealth and bet against inflation, but also as a gift of high status.

The bottoming prices of gold undoubtedly attracted buyers en masse in those markets, eager to boost their holdings. Next month will be interesting, as May is the traditional month for marriage for Hindus (meaning a lot of gold will change hands). However, given the recent lows and the rush of buying, we may actually see an anemic May, as the Wall Street Journal reports.

Equities and Silver

In conclusion, the latest bounce in gold prices is more than likely the consequence of savvy Asian buyers rushing in to take advantage of some of the lowest-ever gold prices. And once that rush is over, we’re likely to see the consequent increase in prices taper off.

Equities, instead, seem to be where the market is turning its attention. Money managers were able to gain $2.6 billion from commodity funds just last week, with outflows from gold and other precious metal funds amounting to $2.15 billion.

Meanwhile, silver remains attractive, with prices in New York shooting up 3.4 percent last week. And as a slow but steady economic recovery pervades the U.S. market, investor worries about unchecked inflation may well be easing—another reason why gold’s resurgence may not continue much longer.

That’s not to say gold won’t continue to be the first-choice safe-haven investment. But with all the gold that’s being dumped on the market recently, someone will have to buy it up. And a surplus of gold means further price fluctuations to come. 

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