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Gold price surges to 10-week high of $1,277

By Vicky Kapur

After remaining under the weather for the past two months, gold price showed some real spark on Friday, January 24, 2014, when it spiked up about $15/ounce in the blink of an eye to scale $1,272.33 per ounce. In early trade this morning, at about 4am UAE time, the price of an ounce of gold rose further to a 10-week high of $1,277.71, before settling down a little.

About a month ago, gold price was reeling at $1,198.40, on December 23, 2013, and there was no dearth of analysts eager to pen a requiem for bullion’s bull-run – not without reason, though. For the first time in more than a decade, gold was ending the year weaker than where it began.

The year 2013 indeed saw gold bulls sacrificed at the altar of Wall Street, with gold price losing a gut-wrenching 28.3 per cent in the year. And towards the end of the year, when prices fell below the $1,200/oz threshold, a bunch of investment banks were quick to downgrade the yellow metal’s 2014 and 2015 forecasts.

But a spate of disappointing data from China and the US over the previous fortnight left investors scurrying for cover in the relative safety of gold and other precious metals. As Ole Hansen, Saxo Bank’s Head of Commodity Strategy, writes in his latest weekly update, “gold’s credentials as an alternatively investment resurfaced, not least helped by the simultaneous drop in the US dollar, stocks and bond yields.” Gold continued to rally and reached a 10-week high following the longest weekly winning streak since September 2012.

China has reported weak economic data, with its PMI (purchasing managers’ index) falling into contraction territory. While the Asian giant economy is nowhere near a recession – most experts predict a GDP growth rate of between 7 and 7.5 per cent for 2014 – it has indeed slowed down from its previous 9+ per cent growth rates.

Last year, China emerged as the biggest consumer of gold after India successfully took punishing steps to curb imports by its bullion-hungry citizens.

In addition, EU economies seem to be stabilising, and that doesn’t bode well for the US dollar, which tumbled over the past week, taking equities with it. All that and more played a positive effect on gold prices, which seems to have regained the momentum it lost in 2013.

“Many of the major financial markets went against current trends over the past week resulting in increased volatility and uncertainty about the near-term direction. Worries about an emerging market slowdown heightened risk aversion at a time of year where many investors are still looking for the right trading themes for 2014,” writes Ole Hansen.

“This aversion caused the US dollar to weaken, not least driven by JPY [Japanese yen] buying as overextended short positions were scaled back. Falling emerging market stocks and currencies spread to some of the major stock markets with the S&P 500 falling for a second consecutive week. Bond markets received a boost from this with US 10-year government bond yields falling to a two-month low,” he said.

“These developments played into the hands of gold investors with both the physical metal and gold mining stocks rallying while growth-dependent commodities such as industrial metals fell,” he noted. “The stock market weakness which led to buying of bonds had the most significant impact and as a result, the December high at $1,268 per ounce was challenged which potentially now could see gold target its 200-day moving average currently at $1,318 per ounce,” noted Hansen.

Does that mean that gold’s problems are over, and will it continue rally this year?

A number of market pundits believe that gold’s upside may remain capped around the $1,300/oz mark, which doesn’t leave much upside from current levels.

Nevertheless, analyst opinion and forecasts remain subject to market conditions, and if the spate of disappointing data doesn’t abate soon – and if rumours about India contemplating lifting some of its gold import curbs come true – 2014 could well see gold rally once again.