What is gold up to?

Gold’s recent bounce, from a drop below $1200 an ounce, has prompted many reports to suggest that the precious metal may have less of a bleak time this year.

There are two main things investors are looking at – firstly, the number of short sellers that have decreased their positions and secondly, strong physical buying in China as we approach Chinese New Year. However, there are other factors worth considering, before getting ahead of ourselves, such as the strength of the US dollar and the Fed’s reducing stimulus.

Last year, gold did not react accordingly as a hedge against crisis or risk, especially during the debt-ceiling debate. I believe the main reasons were due to the extraordinary returns in the equity markets and the lack of inflation to support the precious metal. Physical sales in China remained strong while sales in India were hit by restrictions.

In Europe, the fundamental problems have not yet been resolved and tail risks remains. So far, there has not been an improvement on the level of high unemployment and debt. A development in the labour market will be a welcomed sign that could point to an easing, of the risk, of deterioration in the euro-zone. The recent industrial production numbers showed that there has been an improvement in the region, this means the appetite for gold is waning along with the risk.

The short-bets along with the long-bets on gold have been reduced. Physical purchases in China will likely ease as we get closer to the Lunar New Year. India’s economic growth is rather muted with signs pointing towards contraction, which means the lift of import bans will not be in the near future.

It is awhile a way before gold can be pronounced as being on a trend reversal to the upside. It may have found a bottom temporarily and it is clear that $1200 an ounce is an important support level. In the immediate scenario, the support level is $1240 and the failure of this support will see gold moving towards $1220.

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