Gold futures surge as traders harness low prices

TradingPub Admin | April 22, 2013

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One piece of futures trading education that can be helpful involves how falling asset prices can help spur demand. 

Gold surged on April 22, as market participants rushed in to take advantage of what many perceive as an undervalued metal, according to Kitco News. 

In early trade, June gold futures were up $38.30 per ounce at $1,434.10 on the Comex division of the New York Mercantile Exchange, the media outlet reports. Other contracts for the precious metal were also having a strong morning, with spot gold most recently being valued $27.40 an ounce higher at $1,434.50. 

If you are looking for evidence of the strong expectation that the commodity will rise in price, you need to look no further than the robust bets that major asset managers such as hedge fund managers have made that gold will appreciate in the future.

Data provided by the U.S. Commodity Futures Trading Commission (CFTC) indicated that asset managers and other speculators have sharply increased their bullish bets, which caused net longs to surge 9.8 percent during the week ending on April 16, Bloomberg reports. 

In addition, data provided by the government agency indicates that short positions plunged 8.2 percent during the period, according to the news source. However, these wagers that the price of the precious metal will increase are still sharply higher than the figure they have averaged since the CFTC started collecting the data in 2006. 

Physical demand
Not only is the price of gold futures being pushed higher by the bullish expectations of major asset managers, but also by the robust demand for the physical metal, Kitco News reports. The purchases of items such as jewelry, coins and bars have experienced a strong increase in light of the recent sharp drop in the price of the commodity.

According to the new source, the recent strong uptick in physical demand for the metal could indicate that the market has reached a recent low point and is therefore in position to head higher in the coming weeks and months.

"As the price moved over $1,400 U.S. dollars/ounce, physical traders, on the expectation that gold could possibly correct back higher, rushed into gold," Frederic Panizzutti, senior vice president at MKS Group, wrote in emailed comments, according to MarketWatch. "Physical demand continues to be very strong and could push the price higher over the coming days." 

Sharp drop
Gold fell into a bear market on April 12, as defined by the asset falling 20 percent from a recent high. Mary Ann Bartels, the chief investment officer of portfolio strategies at Merrill Lynch Wealth Management, told Bloomberg that the recent sharp decline in gold prices has caused many investors to question their holding of the precious metal. 

"This drop happened so fast and so violently," Bartels told the news source. "People are asking 'why do I have this in my portfolio?' But when we run the analysis, nothing has changed, gold adds diversification. Unfortunately, sometimes a diversifying asset doesn't go up."

Gold prices plunged 7 percent during the week ending April 19, which is the period immediately after the precious metal fell into a bear market, according to MarketWatch. The sharp decline has been attributed to many different factors by analysts, such as lowered forecasts from major financial services firms, plunging holdings of the metal owned by exchange-traded funds and concerns that central banks across the world will start reducing their current reserves. 

"Gold will need to find support from the physical market in the near term, but investor interest continuing to unravel poses the largest downside risk for prices, in our view, in the forthcoming weeks," Barclays analysts wrote in a report, according to the news source. 

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