Gold rally has legs on strong China demand
MADRID: Gold’s breakneck rally eased this week, but tailwinds in both physical and paper markets suggest it’s got room to run.
Chinese New Year buying and option prices suggest the stars are aligning for the metal to extend its 6.5% gain in the past six weeks.
“I’m always a bit nervous when gold prices rise this much, this fast,” said Mark O’Byrne, marketing director of bullion dealer GoldCore Ltd.
“But there certainly is healthy demand from China and the futures market – I think we should break highs above US$1,400 later in the year.”
Options traders are betting on at least another month of rising prices. They’re charging more for benchmark call contracts than for similar puts, and by the biggest premium since November. The bias, measured in implied volatility, has increased to about 0.6 percentage points.
Gold tends to do well in January and February. That is when demand spikes in the biggest consuming nation, China. Over the past decade, the metal advanced by about 6% on average in the first two months combined.
The Chinese New Year, which is often celebrated with gifts of gold in much of Asia, falls on Feb 16 this year.
Still, a technical indicator points to a rally that may have grown tired.
The metal, which reached a fourmonth high this week, crossed into 2018 with an eight-day rally, the longest string of increases since 2011. Now, it is considered overbought, according to the relative-strength index, a gauge of momentum.
As gold is quoted in the US currency, its upswing largely depends on whether the greenback’s losing streak continues.
Option prices signal that traders foresee the US dollar falling over the next month against the euro, yen and pound.
That is good news for bullion: The 120-day price pattern is close to its strongest negative correlation since late 2012.