Upbeat German sentiment data and weaker-than-expected U.S. durable goods data helped yellow metal futures settle at $1,197 on Wednesday, up $5.60, but gold was also boosted by data revealing that gold shorts, or bets on a price decline, had been aggressively added to positions in recent weeks.
CFTC data covering U.S. trader activity for the first two week of March showed gold shorts at highs not seen since December, setting the stage for the "short-covering rally" that has since followed.
Gross gold shorts reached 15 million ounces in the three weeks to the 17 March, representing 85 percent of the all-time high.
"The considerable increase in gold shorts over a relatively short span of time meant that the risk of a short squeeze was already elevated and the dovish Fed outcome was more than enough to trigger short-covering," Edel Tully, global precious metals strategist at UBS.
Longs, or bets that the asset will rise in value, in gold fell to their lowest levels since mid-November, driven largely by shorts.
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"Overall, the latest guidance from the Fed is friendlier to gold versus previous expectations and we anticipate that the recovery would continue towards our one-month target of $1,200 as positioning further corrects from short-term overextended conditions," Tully said.
"Further out, unless a significant catalyst emerges, we maintain our expectation for the market to continue consolidating around these levels, with our three-month target at $1170," she added.
Tully said she expects this week's CFTC report to show a considerable reduction in short positioning and some rebuilding in longs following the March 18 Fed meeting.
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"Bottom line—the Fed outlook is mildly positive for gold, as an April hike is essentially off the table and policy statements appeared to talk-down the extraordinary dollar strength of late," said commodity analysts led by Aakish Doshi at Citi.
"This lends some much needed support for bullion prices which had prior to the FOMC release declined around 10 percent since late January. But it seems unlikely to prompt sustained medium-term gold price appreciation in our view," Doshi added.