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Gold price surges as stocks correct

The fear trade

The price of gold spiked as much as $44 an ounce higher in midday trade Tuesday on the back of another day of selling on equity markets and after finding support from a softer dollar and a stronger oil price.

On the Comex division of the New York Mercantile Exchange gold for February delivery was changing hands for $1,232.70 an ounce, up $37.80 or 3.2% from Monday’s close.

The gold price jumped out of the starting gates on Tuesday rising to a high of $1,239.00 by 10am EST in heavy volumes of more than 20m ounces traded by noon.

Silver traders followed the gold market higher with March contracts adding over 5% to $17.11, down from a day high of $17.23 an ounce early on.

A correction on global stock markets – some say a long overdue one – after a relentless seven week rally to record highs in the US was the main factor behind gold’s strength this week.

While the drop in the Dow Jones and S&P500 indices was far from dramatic, Chinese stocks were hammered down 8% overnight on increasing worries about a slowdown in the world’s largest economy and fears of a return to crisis mode in Europe after trouble in Greece and other peripheral economies saw equity markets in the trading bloc sell off heavily.

Gold has been uncharacteristically strong against a rampant US dollar which jumped to a more than 8-year high against the currencies of its major trading partners following Friday’s blockbuster jobs report in the US.

Gold and the dollar usually move in opposite directions, and another retreat in the dollar index and slight improvement on oil markets on Tuesday provided additional support to the metal.

Gold’s gains since hitting four-year lows early November reached 7.5% today while silver has advanced 10.6% over the same period.

Speculators in gold futures and options reduced their bearish bets on gold by 16% last week, cutting back shorts from near record levels reached in October and adding to long positions at the same time.

Net long positions held by large investors like hedge funds jumped to just over 79,300 contracts or close to 8m ounces in the week to December 2 according to Commodity Futures Trading Commission data.

That’s more than double the number of bets that prices will rise held by speculators a year ago, when gold was hovering near the same levels.

Silver price speculators cut bets that the price will fall by 23% increasing their net long position substantially.

The rally in precious metals over the last month hasn’t convinced investors in physical gold and silver-backed exchange traded funds however.

Unlike large investors retail buyers of gold remains negative about gold prospects and have been selling into rallies. The latest weekly data show the holdings of gold and silver ETFs dropping again.

Net sales were modest – only 4.6 tonnes – but did drop overall holdings back to five-year lows of 1,610.8 tonnes. Gold bullion holdings hit a record 2,632 tonnes or 93 million ounces in December 2012.

Outflows from gold funds are nowhere near as dramatic as 2013 when 800 tonnes were pulled out, but year-to-date gold ETFs have experienced outflows of 152 tonnes, an 8.6% drop.

Investors in silver continue to reduce their exposure to physical silver-backed ETFs which at the start of October reached a record 20,182 tonnes.

Last week 134.2 tonnes left silver funds reducing total holdings to 19,846 tonnes, but so far this year silver vaults have added 470 tonnes or 7.8%.