Thursday, July 25, 2013

Factors behind gold's rally

Gold finally has experienced a long-overdue rally after what has seemed an endless decline through much of 2013.  The latest rally caught many traders short, forcing them to cover and thereby fueling the rally even more.  The growing list of bearish institutional banks growling against the yellow metal only strengthened the likelihood of a gold relief rally, as discussed in recent reports.

Gold traders have been bullish for four executive weeks according to Bloomberg.  Analysts point to the Fed Chairman Bernanke’s proclamation that he will prolong the stimulus if U.S. economic growth slows as the primary reason behind the rush to gold.  I disagree with this assessment since this theme has been a constant for the last several weeks and (until now) to no avail.  A more likely reason is the record “oversold” condition of the yellow metal according to the 10-month price oscillator (below).  A record build-up in short interest by uninformed traders is also fueling the latest rally.

The recent decline in gold prices revived sales of jewelry, coins and bars, according to Sharps Pixley, especially in China and Japan.  Concerns over near-term gold supplies have also helped push up the prices of the July futures above the August futures, according to sources.  In reflection of this, the cost of borrowing gold has risen to a four-and-a-half-year high in London.