Friday marked gold’s highest point in two months. Gold is up over $50 per ounce since the beginning of the year and continues to show promise. Many factors have come into play this week to reach these new highs. Here is a closer look at some of the highlights this week.
Gold and the Dollar
Typically as the dollar performs well, gold tends to suffer. When the overall value of our currency declines however, it bodes well for precious metals as investors look for a place to conserve their wealth. This can be seen by the dollar’s lackluster performance on Friday. The US dollar posted its biggest one-day drop in three months which helped boost gold to over $1,270 per ounce.
India’s Gold Premiums and Restrictions
Premiums on gold in India dropped to around $80 per ounce on Friday which made it easier to buy gold bullion. This was a significant drop from just two days earlier on Wednesday of $110 per ounce. Now premiums are hovering at half of the record high last month of $160 per ounce. This alleviation is much welcomed throughout India – a country that led the world in gold consumption until this year when China took the lead. “There is panic in the market on rumors of easing restrictions, so premiums are down. If there is an announcement by any chance, there will be a greater fall in premiums,” said Harshad Ajmera, director of the All India Gems and Jewellery Trade Federation.
To the above point, it seems the government could be in talks to ease restrictions on gold. Ruling Congress chief Sonia Gandhi recently requested that the government review the strict import restrictions on gold. This idea was unfortunately shot down by Indian Finance Minister P. Chidambaram. He mentioned there needs to be a better grasp on India’s deficit and it’s unlikely anything will happen until mid-February.
Although no solid progress has been made on India’s gold import restrictions, at least premiums are down. Furthermore, India is seeing the initial signs of talks surrounding this subject. Mid-February is also a few weeks away which makes easing restrictions seem much more tangible. This date is not set in stone, but at least the government is mentioning loose dates of next month and not next year.
Traders Bailing on Gold Shorts
Jim Iuorio is the managing director of TJM Institutional Services and an experienced futures and options trader. He stated, “In a heavily shorted market, you’ll get to a level where people can no longer stand the pain, and then everybody rushes to the exit at once, causing the move to feed off of itself,”
This recent high of just over $1270 per ounce has been getting a lot of attention from traders and for good reason. In mid-2013 when gold fell $75 in one session it landed at $1,275.40 and found a support of $1268.70. Iuorio says, “You have to assume that there’s a lot of people who shorted the market since that tumble, so that’s probably where people sweat,” All in all, investors may be feeling the pain at these levels and if a large enough group bails on their shorts – gold could stand to see yet another gain.
All eyes will be on the next Federal Open Market Committee meeting on Tuesday and Wednesday of next week. If the call for further tapering is made, then gold will likely slip away from this recent high. On the other side, if no action is taken then gold has many indicators to continue its current pace. It’s hard to predict what the Fed will do next week, but recent job data has not been the best, and now with the dollar taking a hit – the outlook is questionable.
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