Last, but not least, gold loco London is trading in a backwardation (the market condition where the price of a futures contract is trading below the expected spot price at contract maturity), at least out to one year forward, which makes borrowing gold significantly more expensive now than at any time over the last four and a half years. You could potentially create a one-year US Dollars at Libor minus 50 basis points, IF you are able and willing to lend gold loco London for one year, through OTC gold swaps.
All of this might help to explain, why we have seen this short covering rally, but it does not need to end there. Gold entered into a bear market after the rout in April of this year. The common and accepted definition was, that the price of gold had dropped by more than 20 per cent from the top price of US $ 1926.
We subsequently fell to the low of US $ 1180.50. A 20 per cent rise of gold price from this level would bring us towards US $ 1416.60 level and a confirmed close above this level, should confirm the re-establishing of a bull market, all else being equal. However, there is no definitive write-up of what constitutes a bull or bear market, but it is always a question of perception.
The next month will surely bring new challenges, Non-Farm-Payrolls at the beginning of September and then the next FED meeting on the 17th and 18th September. These events and many other data will ensure that volatility in gold will prevail.
The latest COTR (end of business day 20th August 2013) shows an increase of long positions, and reductions in short positions.
Option volatilities midrates Gold atm (at the money) - Change from 21/7/13
1 month 20.00% up 2.00%
3 month 19.75% up 0.75%
6 month 19.75% up 0.45%
1 year 19.50% unchanged