2014 gold price rally builds against record bearish bets

The gold price enjoyed a second day of double digit gains, adding 1% on Friday to reach a near 3-week high and notching up its best performance since October.

On the Comex division of the New York Mercantile Exchange gold for February delivery added as much as $13 an ounce to a day high $1,238.30 in early afternoon trade.

Gold's fightback from last year's lows of $1,187 which was again tested on the last trading day of 2013 has put the record number of short sellers in the market on the back foot .

Short positions – bets that the price will go down – held by large investors or so-called managed money climbed to a record to 82,765 lots or 8,276,500 ounces in the week to December 24 according to the delayed Commodity Futures Trading Commission data released yesterday.

So many big players short of gold could translate into further upside for the metal as commercial traders and hedge funds are forced to cover their positions should gold go higher from here.

Gold has also been boosted by increased demand from Asia. The premium paid for taking immediate delivery of gold in Shanghai has risen to $23 an ounce, up from zero in November and a 4-month high.

Demand from world number two importer of the metal could also be boosted this year.

The Reserve Bank of India  lifted some import restrictions on December 31 which was responsible for a plunge in imports  on the subcontinent of between 250–300 tonnes in 2013 from a peak above 1,000 tonnes in 2011.

A negative in the market remains continued outflows from gold-backed exchange traded funds.

Holdings of the world’s largest gold ETF – SPDR Gold Shares (NYSEARCA:GLD) – dropped 3.5 tonnes yesterday after a 45 tonne decline in December.  At 794.6 tonnes GLD holdings are at the lowest level since January 2009.

Overall, the more than a hundred gold-ETFs traded around the world saw net selling last year of 869 tonnes with the bulk of the selling – 586 tonnes – occurring in the first half of 2013.

The price of of gold ended 2013 down 28% at a shade over $1,200 an ounce, bringing a 12-year bull run that took it from around $270 an ounce at the end of 2000 to a record high above $1,900 in September 2011 to a decisive end.