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Hedge Funds Go Long on Gold

Release Date: 
Monday, October 15, 2012

Gold saw pressure today on upbeat economic data from the U.S. and China, raising investor concerns that China may not provide fiscal stimulus and the Fed may cease its current quantitative easing program sooner than expected.  Gold was $18.70 lower at 7:13 a.m. Pacific Time on the New York Spot Market, trading at $1,736.60 per ounce.  Spot silver was $.64 lower, trading at $32.94 per ounce.  (Click here for the most current spot prices.)

Data released on Monday showed U.S. retail sales rose in September, suggesting stronger-than-expected economic growth in the third quarter.  The report followed news on Friday that U.S. consumer sentiment unexpectedly hit a five-year high.  "Basically the [gold] market is starting to take stock of better than feared data flow coming out over the weekend,” said Danske Bank analyst Christin Tuxen.

On Monday, data from China showed inflation was in check in September while exports had rebounded at nearly twice the rate expected, dampening expectations for easing measures. The improved export data “might mean there’s less chance of stimulus or the size of the stimulus might be a bit less,” said Alexandra Knight, an analyst at National Australia Bank Ltd. “Precious metals have benefitted a lot from speculation about increased stimulus over the last few weeks.”

If needed, the low inflation figures give China room to act.  “Muted inflation pressure will provide more room for the government to introduce additional policy easing or stimulus measures,” said Lu Ting, chief China economist at Bank of America Corp. in Hong Kong. Yi Gang, a deputy governor of the central bank, said the nation has “relatively large room” for use of monetary and fiscal policies compared with some countries.

Hedge funds and other large speculators have increased their gold positions for the second consecutive week, with net-long positions at 16-month highs, according to the data from the Commodity Futures Trading Commission.

David Levenstein, an independent expert and commentator who has traded precious metals for more than 30 years, said, “For weeks I have targeted $1800 an ounce level for gold prices. And, while prices struggle between $1775/oz. and $1800/oz., I believe that after this current price adjustment the next move will breach this key level of resistance and test $1825/oz. ounce then $1850/oz.”

Gold demand in major consumer India picked up as prices fell near the beginning of the Indian gold-buying festival season which peaks next month.

(Sources: “China Inflation Cools Amid Signs of Stable Economy Growth,” Bloomberg, October 15, 2012;  Gold Drops to Two-Week Low on Signs China’s Economy Stabilizing,” Bloomberg, October 15, 2012; “PRECIOUS-Gold falls 1 pct as U.S. data erodes stimulus hopes,” Reuters, October 15, 2012; Hedge funds pile into gold, gas for second week,” CNBC, October 14, 2012; China’s Economy Shows Signs of Stabilizing as Exports Gain,” Bloomberg, October 14, 2012; “Physical gold and silver needed to weather the coming financial tsunami - Levenstein,” Mineweb, October 11, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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