Gold price tops $1,250 as hedge funds caught short

On Monday, gold built on sharp gains enjoyed on Friday after data out of the US showed employment growth in the world's largest economy at a near-six year low, pushing back any interest rate hike well beyond the summer.

In brisk lunchtime trading on Monday gold futures in New York for delivery in August, the most active contract, jumped to a high of $1,251.30 an ounce compared to $1,208 shortly before Friday's non-farm payroll numbers sparked one of the biggest one-day jumps this year.

Federal Reserve chair Janet Yellen in a speech on Monday suggested despite "significant uncertainties" in the outlook for the US interest rate hikes are still on the cards, but gave no timeline. Higher interest rates raises the opportunity costs of holding gold as the metal provides no yield and any gains for investors is through price appreciation. The jobs data also hurt the dollar which usually moves in the opposite direction of the gold price.

"The bullish sentiment is coming at a cost for gold longs…

Amid the negative turn in sentiment on gold markets last month, large-scale futures and options speculators such as hedge funds sharply reduced record-breaking bullish positions built up since the start of the year. Ahead of Friday's jobs report long positions – bets that prices will go up – were slashed by a third.

According to the CFTC's weekly Commitment of Traders data up to May 31 released on Friday after the market close, "managed money" investors on the gold derivatives market  added to shorts – bets that gold can be bought at a cheaper price in future – and cut back longs slashing overall net position to 15.5 million ounces.

That's down from 23.4 million ounces mid-May which was at the highest level since the August 2011 when gold peaked at an all-time high above $1,900.

Hedge funds are also paying the highest premium in at least five years  to roll-over their  longs to the most active contract to avoid taking physical delivery according to a Bloomberg report:

The bullish sentiment is coming at a cost for gold longs,” Brad Yates, head of trading for Dallas-based Elemetal LLC, one of the biggest U.S. refiners, said last week. “There’s massive speculative position starting to roll, so they’re selling June and buying August.”

Before the rebound the gold price was down roughly $100 per ounce in the month of May after briefly scaling $1,300 at the end of April. Year to date the metal is higher by 18%, the best start to a year in a decade.