Gold Pulls Back After Biggest One Day Rally For a Year

July 23, 2013 at 11:34

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Gold eased back below $1,330 an ounce as gains in the dollar prompted buyers to pause after the metal’s biggest one-day price rise in more than a year.

The precious metal rallied 3 percent on Monday as a break of technical resistance at $1,300 and $1,322 prompted dealers holding short positions, or commitments to sell at a certain price, to close out those bets.

Assurances from the U.S. Federal Reserve last week that any scaling back of its gold-friendly quantitative policies – a mooted end to which drove gold sharply lower in June – would be data-dependent had already put upward pressure on gold.

“Gold has done a lot, so a bit of consolidation here is to be expected,” Societe Generale analyst Robin Bhar said. “It could have the legs to rise further, given that the Fed’s recent comments were a lot more dovish than the market had expected, and some of the U.S. data was weak.”

“I don’t see much fresh buying, but some of the shorts could try to cover,” he said. “This has wrong-footed a lot of people.”

The dollar index rose 0.2 percent, adding some pressure to gold, although it remained near one-month lows as a retreat in benchmark U.S. 10-year Treasury yields gave investors less incentive to buy the U.S. unit.

Softer yields, which reduce the opportunity cost of holding non-interest bearing bullion, have also taken some pressure off gold, analysts said. Gold’s weakness in early July coincided with a rise in 10-year Treasury yields to near two-year highs.

Liquidation continued from gold-backed exchange-traded funds, with outflows from gold ETFs tracked by Reuters totalling 10 tonnes on Monday. The world’s largest, the SPDR Gold Trust , reported a 1.2 tonne-drop in its holdings.

Outflows from gold ETFs, which issue securities backed by physical stocks of bullion, have averaged 20 tonnes a week this year, Reuters data shows. Investors say they want to see outflows steady before buying back into gold.

“Given the ongoing ETF outflows we believe it is still too early to describe this (latest rise in gold prices) as a lasting trend reversal,” Commerzbank said in a note.

Consumption in the world’s number one gold buyer, India, is expected to by cut by fresh moves by India’s central bank to tighten gold imports on Monday, making them dependent on export volumes.

Dealers say however than demand from China has been “quite healthy”, pointing to elevated premiums on the Shanghai Gold Exchange. Shanghai gold is about $20 an ounce more expensive than London spot prices.