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BookmarkThe “very sharp reversal in gold and silver” appears to be due to short covering after gold’s inability to fall below an April low of $1,321.50, said Chintan Karnani, an independent bullion analyst based in New Delhi.
Through Friday, the most actively traded June contract had dropped by $109 over the past seven sessions. The last time gold fell for eight consecutive sessions was in 2009.
“The big rally in the U.S. and Japanese stock markets, a stronger U.S. dollar, and low inflation expectations worldwide are major bearish weights on the metals and entire raw commodity sector at present,” said Peter Hug, global trading director at Kitco Metals Inc., in a daily note.
By the close of gold trading, U.S. equities were trading lower on Monday. The greenbackDXY +0.36% also fell against currency rivals, especially the Japanese yen USDJPY +0.47% helping gold to trade higher.
Gold prices have fallen about 6% this month — following April’s loss of 7.8% — with the market hurt by constant outflows from gold-backed exchange-traded funds, including SPDR Gold Trust GLD -2.15% .
There is a “significant percentage of hedge funds who are still liquidating paper gold as a strategy for freeing up capital,” said Jeffrey Sica, president and chief investment officer of Sica Wealth Management.
“We are also in the midst of a rotation out of paper gold into physical gold,” he said. “Since much of the volatility in paper gold has been caused by the options and futures market, I consider that we could see prices retest the $1,330 range.”
The Commodity Futures Trading Commission’s Commitments of Traders report showed Friday that speculative funds, or managed money, added to their gross shorts by 5,977 to reach a record high for the disaggregated COT report of 73,149 contracts, according to Gene Arensberg, editor of the Got Gold Report.
“The large [speculators] held on to their long contracts and remain net long gold, but they have put on quite a large ‘insurance’ short position,” he said. “Once we see a significant reversal in the gold market that means there is a ton of short covering horsepower.”
The speculative funds have “taken an overly aggressive stance on the short side for them. That’s the kind of imbalance we watch for and it could lead to quite a violent reversal,” Arensberg said.
Expectations that monetary stimulus by the U.S. Federal Reserve will soon come to an end have also hit gold prices.
Fed Chairman Ben Bernanke on Wednesday will testify before the Joint Economic Committee about the central bank’s economic outlook and the FOMC will release minutes from its most recent policy meeting.
Silver rebound
Silver futures on Monday rebounded along with gold.
Reuters
Silver rebounds after falling to its lowest levels since October 2010.
Silver for July delivery SIN3 -2.13% rose 23 cents, or 1%, to $22.58 an ounce. Tracking the most-active contracts, futures prices on Friday closed at their lowest level since October 2010, according to data from FactSet.
In Asia, silver prices were “slammed” by 10%, falling to $20.30 from $22.36 in just four minutes, according to Mark O’Byrne, research director at Dublin-based GoldCore. Prices then rebounded.
“Silver’s fall could have been related to the gyrating yen-dollar price as some hedge funds and banks use proprietary trading systems and sharp losses in a leveraged yen-dollar position could have led to forced liquidation of silver,” said O’Byrne.
“However, the scale of the losses in the silver market would suggest that it was not simply due to margin selling on yen speculation losses,” he said. “Rather, the scale of selling suggests one or two massive sellers, likely institutional, who were determined to force the silver price lower, possibly in order to close or buy back underwater short positions.”
Ross Norman, chief executive officer of Sharps Pixley, said silver is oversold both technically and fundamentally. “The whole commodities selloff is incompatible with the notion that we have a normalizing macroeconomic environment,” said Norman in emailed comments.
Other metal prices on Monday traded higher.
June palladium PAM3 -1.65% closed up $10.50, or 1.4%, at $750.75 an ounce. Last week, palladium gained 4.9%.
July platinum futures PLN3 -2.35% added $16.60, or 1.1%, to settle at $1,484.60 an ounce.
July copper HGN3 +0.09% gained 4 cents, 1.2%, to close at $3.36 a pound. The metal on Friday logged its first weekly loss in four weeks, giving up 0.9%.
