Gold futures bounced higher after a seven-session losing streak. "We are in the midst of a rotation out of paper gold into physical gold," according to one expert. Gold prices have fallen more than 7% this month with the market hurt by constant outflows from gold-backed exchange-traded funds.
By Myra P. Saefong and Barbara Kollmeyer
May 20, 2013, 1:06 p.m. EDT
SAN FRANCISCO (MarketWatch) — Gold futures bounced higher Monday, finding support after a seven-session losing streak, while silver rebounded from a level not seen since 2010.
Gold for June delivery GCM3 +1.37% was last up $17.40, or 1.3%, to $1,382.10 an ounce on the Comex division of the New York Mercantile Exchange after tapping a low under $1,340.
The “very sharp reversal in gold and silver” appears to be due to short covering after gold’s inability to fall below an April low of $1,321.50,” said Chintan Karnani, an independent bullion analyst based in New Delhi.
Through Friday, the most actively traded June contract had dropped by $109 over the past seven sessions. The last time gold fell for eight consecutive sessions was in 2009, with that run ending on March 4.
"The big rally in the U.S. and Japanese stock markets, a stronger U.S. dollar, and low inflation expectations world-wide are major bearish weights on the metals and entire raw commodity sector at present,” said Peter Hug, global trading director at Kitco Metals Inc., in a daily note.
U.S. equities climbed on Monday. The greenback DXY -0.34% , however, pulled back against currency rivals, especially the Japanese yen USDJPY -0.37% helping gold to trade higher.
Gold prices have fallen more than 7% this month — following April’s loss of 7.8% — with the market hurt by constant outflows from gold-backed exchange-traded funds, including SPDR Gold Trust GLD +2.23%.
There is a “significant percentage of hedge funds who are still liquidating paper gold as a strategy for freeing up capital,” said Jeffrey Sica, president and chief investment officer of Sica Wealth Management.
“We are also in the midst of a rotation out of paper gold into physical gold,” he said. “Since much of the volatility in paper gold has been caused by the options and futures market, I consider that we could see prices retest the $1,330 range.”
Gold’s latest drive lower came after the Commodity Futures Trading Commission’s Commitments of Traders report released data Friday.
The report showed that speculative funds, or managed money, added to their gross shorts by 5,977 to reach a record high for the disaggregated COT report of 73,149 contracts, according to Gene Arensberg, editor of the Got Gold Report.
“The large [speculators] held on to their long contracts and remain net long gold, but they have put on quite a large ‘insurance’ short position,” he said. “Once we see a significant reversal in the gold market that means there is a ton of short covering horsepower.”
The speculative funds have “taken an overly aggressive stance on the short side for them. That’s the kind of imbalance we watch for and it could lead to quite a violent reversal,” Arensberg said.
Expectations that monetary stimulus by the U.S. Federal Reserve will soon come to an end have also hit gold prices.
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