SHORT SQUEEZE: Gold price spikes $40

Gold shorts may be losing the courage of their convictions ahead of D-day on Friday.

The gold price briefly touched a fresh 5-month low in brisk, volatile trade on Wednesday before turning sharply higher after the release of strong US jobs numbers.

On the Comex division of the New York Mercantile Exchange, gold futures for February delivery traded at $1,251.50 an ounce during early afternoon dealing, up $40 from the $1,210.80 low struck shortly after the opening. Silver tracked gold's trading pattern, jumping more than 4% to a day high of $19.89.

The precious metal has been under pressure as markets believe a recovering economy – and specifically an improved labour market – could prompt the US Federal Reserve to slow the pace of its $85 billion in monthly bond purchases as soon as December.

The market got its first taste of the state of US employment today, with the November ADP non-farm payroll number coming in at 215,000 jobs added, easily beating the 172,000 forecast and the 184,000 reading in October, which was also revised upwards from 130,000.

A strong number usually leads to a sell-off in gold as it strengthens the hands of Fed members who are eager to start unwinding the near $4 trillion the central bank has taken onto its balance sheet since QE1. The Fed first embarked on its quantitative easing program in December 2008 when gold was trading around $830 an ounce.

The reaction of gold traders to the news was typical, but the rapid reversal after the initial slump shows just how finely poised the gold market is at the moment and how much uncertainty there is about future prices.

Friday's official jobs numbers would be the best indicator of the Fed's direction when it meets December 17–18 and large gold investors have been positioning themselves in anticipation of the closely watched data.

Standard Bank in its daily research note points out that shorts – bets that the price is going lower – are building in the gold and silver futures market with Comex gold shorts jumping to a 4 month high ahead of Friday’s US employment data:

We believe one can interpret the way the market is trading in one of two ways: Either the gold price behavior is a signal that the market knows best and the employment number will most likely be a good print;

Or, Friday’s employment number may not necessarily beat expectations, but this is irrelevant to participants as the majority looks through the noise towards the end goal, i.e. tapering and a slow normalisation of US monetary policy which is coming closer by the day.

Judging by Tuesday's rapid price reversal, gold shorts may be losing the courage of their convictions ahead of D-day on Friday.