Gold markets are having difficulty making up their minds on how the weakness of currencies like the rupee will affect demand for physical metal. Does it mean that gold being more expensive in local currency will see a drop off in demand?
The cost of borrowing gold held near a 4 1/2-year high in London as U.S. futures moved into backwardation this month, a signal that near-term supplies are tightening at a time when prices gained on more physical demand.
Gold and silver prices declined during the first half of the week with gold falling $70 to a low of $1,274 on Wednesday morning. The $1,300 level was seen as support that failed spectacularly, and it was this that has influenced commentators and investment strategists.
The market assumption is that economic recovery leads to higher bond yields, which make gold expensive to hold. This would be true if investment funds were significantly long in gold, but they are not.
Gold is on course for its third week of gains, buoyed by a weak dollar, no definite end to quantitative easing and continuing ultra loose monetary policies. Central bank gold buying is also supporting gold.
This week gold moved firmly above the $1,300 level, which with expiring 1300 call options had been a line in the sand. Last week’s Commitment of Traders report showed that some of the hedge funds have begun closing their shorts,
Precious metal prices continue to build a base, with increasing evidence of a shortage of physical metal. In London gold forward rates (GOFO) continue to be negative, which means that the market will pay you more interest on your gold than on your dollars.
This week bullion prices began to rise in quiet conditions, with gold rising more than 6% and silver by slightly more. Trading patterns have changed, with much of the rise coming during U.S. trading hours, confirming that the short positions on Comex are being squeezed.