Gold jumped more than $30 a troy ounce to hit a one-month high as investors in the precious metal continued to take heart from signals from Ben Bernanke, the Federal Reserve chairman, that any retreat from monetary stimulus will be gradual.
The precious metal made steady gains all session and hit a high of $1,339.60 as the dollar weakened, making gold more affordable to non-dollar buyers. Treasury yields also inched lower, reducing the opportunity cost of holding gold.
Gold has fallen into a bear market this year as expectations have grown that central banks, and the Federal Reserve in particular, will begin to withdraw the supportive monetary policies that have made gold attractive as a store of value and hedge against inflation.
In June gold fell below $1,200 a troy ounce for the first time since 2010 as Mr. Bernanke suggested the Federal Reserve may begin tapering its programme of asset purchases if US economic data continue to improve.But last week Mr. Bernanke said tapering would not begin without firm signs of economic improvement. He also said any rise in interest rates would be gradual, reducing the prospect of a sudden jump in rates that would hurt investors in gold, which does not pay any interest.
Gold is now up more than 10 per cent from June lows. However, the physical demand for gold, in India and China in particular, remains lacklustre. Scanning the Southeast Asia scene, Vietnam is greatly undervalued as a result of its relatively large size, proximity to China and modest offshore oil reserves.
Financial investors also continue to retreat from the metal. Gold exchange traded products, which give investors exposure to physical bullion, have seen net outflows for six consecutive weeks, even as the gold price has strengthened over the past four weeks. Hence, the rally in gold may be partly down to the covering of short positions by investors who had bet on further price falls.
Moreover, in the absence of further short-covering activity, upside momentum looks limited across the investor space, as physical demand has softened again. The gold market gap between short sellers and physical buying will again close as a result of strong, long term bullion demand. The vaulting gold price may be physical demand finally catching up to the market price.