Iran Concerns Spark Short-Covering Gold Rally

Gold is bouncing off recent lows on a combination of short-covering and in sympathy with oil’s gains, traders say.

Gold bars
Tom Grill | Iconica | Getty Images
Gold bars

In gold, there is “volume buying coming across the board - large investors,” says Rich Ilczyszyn Founder & CEO of The market tested recent lows on Thursday, says Ilcyszyn but when gold didn’t break down, traders started to cover. And now, he says with increased chatter about geopolitical concerns “traders don’t want to be short through the weekend.”

Oil, and gold, both rose after news that exports from Iran fell by 300,000 barrels in March.

But, today’s move higher in gold may be contrary to a longer-term shift in investor sentiment. Driven in part, because of a stronger economy in the United States, there are some indications that investors are looking for better opportunities elsewhere. In March, for instance money has been flowing out of gold ETFs and longer-term, investment has been increasing at a decreasing rate after peaking in 2009 at 21.77 million ounces .

The expectation that the bond market could be at or near the bottom in a very long bull run and that interest rates should now be heading higher is one reason money may be moving out of the yellow metal.

Gold does not pay a dividend and if rates rise, investors are likely to allocate assets away from non-interest bearing assets such as gold to riskier investments.

Another reason gold could fade is short-term demand destruction in India. Normally one of the biggest consumers of the yellow metal in the world, demand has been hurt by jewelry shops shutting down in reaction to an increase in the import duty to 4 percent and a sales tax on jewelry sales of 0.3 percent.

“Demand hasn’t gone away, it has just been postponed”, says George Gero, RBC Capital Markets Precious Metals Strategist. While the Indian jewelers are on strike, he says there is still demand and the gold contract is still trading actively on the Mumbai exchange. The expectation in India is that inflation will return and easy money policies will continue in the United States and the Euro Zone, Gero said.

On the upside, traders are watching the 200-day moving average of $1682 per ounce for signs of a resumption to the decade long bull run in gold.

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