Futures & Commodities

Gold shining as markets tumble

Gold hovered near 30-day highs Friday as safe haven bids and a spike in short-covering positions pushed demand for the precious metal higher.

Continued concerns over Chinese growth and expectations of an upcoming interest rate hike by the U.S. Federal Reserve have sent risk-averse investors into gold.

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"In China… the economy is slowing, the stock market is falling and the currency is being devalued, and that really plays into the hand of what drives gold price higher: fear, uncertainty and the belief that authorities are losing control," Matthew Turner, a precious metals analyst at Macquarie Securities told CNBC's Worldwide Exchange program on Friday.

"But it's also about the United States because the consensus on a September rate hike has now gone, and low interest rates are good for gold prices," Turner added.

Prices were near $1,154.81 per ounce at midday London time, clocking a 0.1 percent increase for the session and a 3.5 percent rise for the week, according to Reuters--edging towards the highest weekly gain since January.

However, much of the gains have been attributed to short-covering positions in the futures markets which were close to record levels, Carsten Menke, Commodities Research Analyst at Julius Baer commented in an emailed statement Friday.

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Short-covering is a technique used by investors to avoid losses on short-selling positions when prices begin to move higher. It involves buying into the stock or commodities that was previously shorted.

Ross Norman, the CEO of gold dealer Sharps Pixley, said that speculation around a delay of a much-anticipated Fed rate hike from the original expected date of September has prompted a further bout of short covering following an initial round following China's yuan devaluation moves.

Considering both risk aversion across financial markets and short-covering, Menke said he expects gold to remain support in the short term.

However, there are reasons to remain "cautiously bullish" Norman said.

Futures traders holding record gold shorts for the first time since data was collected in 2006, making gold shorts a "very crowded trade."

A melter casts an ingot of 92.96 percent pure gold at a procession plant of the Olimpiada gold operation, owned by Polyus Gold International company, in Krasnoyarsk region, Eastern Siberia, Russia.
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Secondly, gold is trading at a small backwardation -- when a futures price falls below the expected value of a commodity -- which suggest tightness in the market, Norman said, explaining that backwardation is rare for the gold market, and "certainly indicates something is afoot of a bullish nature."

"Thirdly physical demand is looking good," Norman added.

Menke, meanwhile, wasn't as optimistic. "Longer-term, we...maintain a bearish view against the backdrop of sound growth, higher interest rates and muted inflation."

Gold previously hit a five-and-a-half-year low back in July, according to Reuters data

"If we do get a September rise, we see it heading back to $1,050," Turner said

But there could be a could be a gradual rise in its wake. "Our analysis of previous Fed tightening cycles shows that they're not so bad for gold actually," he added.