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Will gold prices start climbing?
Fri, 26 Jul Pre-Open

After watching some drastic one day plunges this year for the yellow metal, investors are wondering why gold prices are rising now- could this be the start of a healthy, prolonged rebound? Short-covering by technically-oriented traders and the perception that the Fed will continue QE for the foreseeable future are the short-term answers as to why gold prices are rising now. But there are solid fundamental reasons as to why gold should and will keep recovering in price in the months ahead.

A factor supporting gold prices is backwardation. That is, the near-term contract for gold rarely trades at a price above the longer term contracts. It is rarely in backwardation. But in recent days that has occurred for the first time since the 2008 financial crisis. This means the physical demand for gold is far outweighing the physical supply of gold. Another indication of dislocation in the gold market is the rising lease rate for gold. The lease rate is the amount it costs to borrow actual physical gold. The higher the rate, the tighter the market is - that is, the less physical gold supply there is in the marketplace. Recently the one-month gold lease rate jumped to 0.3%, the highest level since January

Gold is likely to perform well in the second half of 2013. There is a negative correlation between the U.S. dollar and gold in recent history. While the rising U.S. dollar keeps downward pressure on the price of gold, rising global uncertainties support its role as a safe haven.

India and China still remain the largest consumers of Gold in the world. In addition to China, India will remain the second largest source of demand. Even if India's economy grows at 5% per year, proportionally, its gold demand is estimated to increase by 28% in five years. As the Bank of Japan targets 2% inflation, the Japanese have become a force in gold demand too. Looking beyond the shadow of the strong U.S. dollar, gold has a very bright future.

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